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, where you can access these from the age of 55 as a combination of a 25 percent tax-free lump sum (in the UK, though it may well be taxed locally depending upon where you live) and a continued pension, which is paid either through a scheme pension, an annuity, or accessed via Flexi Drawdown.
You will be taxed on this income in the UK, unless you’re living in a part of the world where there is a dual taxation agreement in place with the UK.
In the case of defined benefits, or final salary schemes, they are one of the most generous pension options available and it is recommended that if you are lucky enough to have one of these that you do not transfer to flexible benefits (QROPS or a SIPP,) as it will mean a loss of a guaranteed pension income for life.
However, you may find that a high transfer value, a desire to maximise succession benefits (for your children or partner), 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 of the best ways to simplify the ongoing management of your pension assets when you become an expatriate is to make use of 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 the age of 75. Currently, in the UK, pensions are taxed on beneficiaries 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, making them easier to administrate and potentially saving significantly in fees and charges. 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 allow for your pension to be denominated in a currency other than GBP, thus removing your currency risk.
- QROPS income can be structured in order to ensure that your local income tax liability is minimised — where there is a transfer from secured to flexible benefits.
- Your UK pension could default to an annuity or already be tied into one. Annuities are not required within QROPS, giving you the flexibility to spend your pension as you wish.
- Once you have moved your pension into a QROPS, it is no longer affected by retrospective changes to legislation that take place in the UK.
- Set up properly, a QROPS is transparent when it comes to charges and fees and are 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. Please note: the exception to this is where there isn’t a dual taxation agreement between the country in which you live in and the country in which your QROPS is established.
Disadvantages of QROPS
- When transferring to QROPS, you will lose the benefits that come with your current UK pension, which 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 could be considered equally robust.
- Costs associated with 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) QROPS holders were not penalised and were able to continue to maintain their existing QROPS arrangements.
- Advice on QROPS has, from some quarters, come from loosely regulated, poorly qualified firms and advisers, and has, therefore, been of relatively poor quality for some clients.
Returning to the UK
The UK government appears to have their sights set on making pension holders abroad, now residing in the UK, meet the same taxation standards as those whose pensions are earned and delivered there. This means that in the future, QROPS pension holders who return to the UK will be expected to pay the same UK levels of tax on their QROPS pensions.
Currently, if you are a QROPS holder and you decide to return to the UK to live, the pension will be classed as a foreign pension and 90 percent of the amount will therefore be taxable as the current rules stand. This looks likely to change, however, to be in line with UK tax rules where 100 percent of pensions are taxable — removing this 10 percent 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, ensuring that you extract the most from 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, and a minimum number of years practicing as a Financial Planner by the Chartered Insurance Institute in the UK.
2. Ask for adequate capitalisation 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 capitalisation.
3. Choose fee-based advice over commission-based advice
Any financial adviser worthy of the name should expect to practise on the basis that they only receive a fee as long as the client is happy with the service that is provided to them. 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 lock-ins/exit fees. Pension transfers are highly complex, and advisers need to know this area of advice extremely well in order to be in a position to best advise you on it.
Russell Hammond, finance expert and an Investment & Pension Advisor at AES International.