QROPS – is it a pension option for expats living abroad?
Following changes to UK pension legislation, financial expert Steven Grover discusses whether a QROPS pension scheme is an option for expats living in Europe.
Many UK Expatriates who have retired in Europe may be unaware of the British Government's changes to pension rules. In April 2006, HM Revenue and Customs introduced QROPS, which allows a non-UK resident to transfer their frozen pension outside of the UK system. This was a big step forward as, previously, UK pensions were traditionally frozen when the holder retired overseas.
So if you have moved abroad to retire, or are thinking about moving abroad in the future, and have private or work pension benefits that would normally be left behind, you can benefit from a QROPS transfer. Pension transfers out of the UK system under a QROPS are a tax-efficient way to greatly enhance pension opportunities. In some circumstances, however, it may not be appropriate to transfer your pension, so each case needs to be treated on its own merits and be fully reviewed by a professional advisor.
Does QROPS apply to me?
If you can answer yes to one or more of the following questions, then it is worthwhile seeking a full expert appraisal of your pension benefits:
- Do you intend to leave the UK to retire in Europe or somewhere else outside of the UK?
- Have you left the UK and are working abroad?
- Have you retired in Europe and still have pensions in the UK?
- Would you like to understand more about QROPS?
What are the key benefits of QROPS?
Annuities are generally unpopular because it means that you give up your capital – the amount that you have built up in your pension, less any tax-free cash you are allowed – to an annuity provider who will guarantee you a lifetime income. The annuity rate, however, reflects interest rates and, as current rates are extremely low, many people have received much smaller pensions than they might have hoped for. If you were being forced to buy an annuity in the current climate, you would definitely see why they are unpopular.
When transferring to a QROPS, you are not required to purchase an annuity and income can be ‘drawn-down' from the fund as and when required. The following example illustrates the point simply:
UK pension Post QROPS
Value of pension fund at retirement: EUR 250,000 EUR 250,000
Cost of annuity purchase: EUR 250,000 Nil
Capital remaining on death: Nil EUR 250,000
Another advantage of drawdown is that you will be given a lot of flexibility with the amount of income you take from your QROPS on a year by year basis. This is because you have the option to take withdrawals from your QROPS, which following changes to legislation in March 2014, ranges from zero to 150 percent the current GAD rate (figure provided by the Government Actuary Department), which is calculated using your current age and the interest rates at the time of retirement.
Tax-free lump sum
With a QROPS approved scheme the amount of PCLS (Pension Commencement Lump Sum) available at retirement can be up to 30 percent, compared to the 25 percent allowed with a UK pension however this does depend on which one of the approved jurisdictions is used.
Age benefits can be taken
Some QROPS jurisdictions will allow you to start taking benefits from your pension at the age of 50, as apposed to 55 years old in the UK.
Inheritance tax planning
Most people would like to think that, upon their death as much of their assets as possible would be passed on to their heirs. It is a complex issue, however, by transferring to a QROPS the taxation of pension benefits on death can be much less punitive. With the current UK pension rules a UK pension scheme could be a taxed up to 55 percent of the fund value before being passed on. By bringing the pension out of the UK and using a QROPS approved scheme, this tax liability can be greatly reduced or in some cases even wiped out completely.
Greater investment choice
By moving an arrangement out of the UK there can be a much wider choice of investments available to the pension fund, as some existing pension schemes can even be limited to just UK investments. A more global focus is particularly important in the current market conditions.
This is a very important consideration for expats who have retired in Europe with UK pensions that will pay their pension benefit in sterling, because this means they not only run an exchange rate risk but also will incur charges for converting their pension benefit payments into euros.
By putting your pension into a QROPS you can receive your pension benefit payments in euros and therefore eliminate any exchange rate risk or currency conversion charges, and have peace of mind that the amount of income you receive each month will be the same.
Can any pensions be transferred into a QROPS?
Not all pensions can be transferred into a QROPS. The main exceptions are UK State pensions and, in most cases, final salary schemes although, in the current market conditions, it would be worthwhile exploring a QROPS in more detail.
However, with changes to UK pensions implemented in March 2014, and further changes still to be approved, getting professional and fully regulated advice is crucial in helping you choose the right jurisdiction in which to hold the QROPS and a suitably approved scheme provider.
Read about changes to UK pensions in 2014, and whether a QROPS scheme is still a beneficial option while living abroad.
Steven Grover / Expatica
Steven is a Partner with the Spectrum IFA Group in France. He specialises in assisting expatriates moving to France or already living here with tax efficient solutions for savings, investments and pensions, as well as other areas like mortgages and estate planning. If you have a question, want to arrange a free financial review or would like further information, you can contact him at +33 (0)6 879 80941, via e-mail firstname.lastname@example.org, or via the website www.spectrum-ifa.com.
This information is only provided as a guide based on our understanding of current QROPS regulations. If you need assistance in this area you are strongly advised to seek the help of a specialist in this field as each individual case is different.
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