An overview of the options for UK pensioners moving abroad during retirement: leaving your pension in a UK plan, or transferring it into a Qualifying Recognised Overseas Pension Scheme (QROPS).
Leaving your pension in a UK plan
You can leave your pensions in a UK pension plan. Here, you access the funds from the age of 55 as a combination of a 25% tax-free lump sum (in the UK, though it may well be taxed locally depending upon where you live) and a continued pension. These funds pay through a scheme pension, an annuity, or accessed via Flexi Drawdown.
Taxes apply to this income in the UK. Exemptions exist, such as if the country you live in has a dual taxation treaty with the UK.
In the case of defined benefits or final salary schemes, they’re one of the most generous pension options available. If you’re enough to have one, don’t transfer to flexible benefits (QROPS or a SIPP); it will mean a loss of a guaranteed pension income for life.
However, you may find that a high transfer value, a desire to maximize succession benefits, a desire to best manage income tax liability, or, perhaps, concern over the long-term viability of the fund, may mean that there is an argument for you to consider a transfer out of your scheme into QROPS.
What is QROPS?
One way to simplify your pension assets is to use a Qualifying Recognised Overseas Pension Scheme (QROPS). A QROPS is an overseas pension, established outside of the UK, which meets specific criteria from the HRMC to allow for the transfer of your UK pensions into UK tax-relieved pension funds.
The key advantages of QROPS
- If you die while living overseas, your beneficiary could avoid paying tax on your pension if you die after age 75. In the UK, taxes apply to a pension’s beneficiary at their marginal rate of tax when the pension holder dies after the age of 75.
- You can consolidate several UK pensions into a single QROPS arrangement. This makes them easier to administrate and potentially saves on fees. Note: like UK pensions, QROPS can be held in a single name only.
- QROPS can offer greater investment flexibility than your pension in the UK, allowing access to a wider range of investments.
- QROPS allows for your pension to be in a currency other than the British pound. This removes your currency risk.
- You can structure your income in a way that minimizes your local income tax liability where there is a transfer from secure to flexible benefits.
- Your UK pension could default to an annuity or already be tied into one. Annuities are not necessary within QROPS. As a result, you can spend your pension as you wish.
- Once you move your pension into a QROPS, it isn’t affected by retrospective legislation changes in the UK.
- QROPS is transparent when it comes to fees. They’re often run on a fixed-fee basis.
- QROPS are exempt from UK income tax. You will normally be subject to the tax rules in the country you live in, which may offer more attractive rates of income tax than the UK. The exception to this is where there isn’t a dual taxation agreement between the country you live in and the country in where your QROPS is established.
Disadvantages of QROPS
- When transferring to QROPS, you lose the benefits that come with your current UK pension. These may include a secured income for defined benefit schemes or guaranteed annuity rates (GARS).
- You lose the regulatory oversight of the UK financial services regulator (the FCA). However, the financial services regulatory environment in many other jurisdictions is equally robust.
- Costs of the initial transfer and the subsequent maintenance of the QROPS may be greater than if your pension remains where it is.
- QROPS may lose status which could require you to move your QROPS to an alternative jurisdiction. When this happened in the past (e.g., Guernsey), penalties didn’t apply to QROPS holders. They could maintain their existing QROPS arrangements.
- Advice on QROPS has come from loosely-regulated, poorly-qualified firms and advisers. As a result, many clients receive bad advice.
Returning to the UK
The UK government has their sights set on making pension holders abroad meet the same taxation standards as those whose pensions are earned there. This means that in the future, QROPS pension holders who return to the UK must pay the same UK levels of tax on their QROPS pensions.
Currently, if you are a QROPS holder and you return to the UK, the pension is a foreign pension. 90% of the amount will, therefore, be taxable. This looks likely to change, however, to be in line with UK tax rules where 100% pensions are taxable — removing this 10% bonus for returning expats.
Tips on finding a QROPS financial adviser
If you’re looking to transfer your UK pensions via QROPS, you should ask for professional advice. Follow the three tips below to put yourself in the very best position in any QROPS arrangement.
1. Double-check your adviser’s qualifications
If possible, try to work with a Chartered financial adviser. Chartered Financial Planner status is awarded to advisers reaching a high level of qualification. There is a minimum number of years practicing as a Financial Planner by the Chartered Insurance Institute in the UK.
2. Ask for adequate capitalization and indemnity insurance
Consider the financial crisis back in 2008 and the financial uncertainty surrounding the UK’s withdrawal from the EU. Sometimes events beyond our control have an impact. Check that your potential advisers have adequate indemnity cover or adequate capitalization.
3. Choose fee-based advice over commission-based advice
Any worthwhile financial adviser should practice on the basis that they only receive a fee as long as the client is happy. Commission-based advice goes against everything a client-focused, impartial adviser should stand for.
Finally, insist that your adviser structure your QROPS on a fee-only basis with no minimum investment period and no exit fees. Pension transfers are highly complex; advisers need to know this area extremely well to best advise you on it.