AES - Transferring a pension

UK pension transfers for expatriates

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Chartered Financial Planner Russell Hammond, APFS MSCI, expands on some of the issues affecting expatriates when transferring UK pensions. One of very few advisers providing advice to expatriates holding the coveted ‘Chartered’ title, Hammond is non-commission based and operates exclusively on a fee-only basis.

If you choose to move overseas to both work and live, or indeed retire, you may wonder to what extent your current UK pensions can be best utilised, as well as how you can augment your pensions now that you are retired or earning and living in another country. Around half a million UK citizens make the decision to emigrate from the UK each year to live elsewhere; despite Brexit, this figure is unlikely to change materially in the future. There is therefore a huge need for pension options for these people.

In broad terms, there are two main options for expatriates in this situation. 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 via a scheme pension, an annuity, or accessed via Flexi Drawdown. You would 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.

UK pensions

The second option involves transferring a pension into a Self-Invested Personal Pension (SIPP) or overseas arrangement, which must be considered by the UK HMRC as a Qualifying Recognised Overseas Pension Scheme (QROPS).

We will focus on transferring a pension using QROPS, looking at some of the key advantages and disadvantages of this option to allow you to best manage your pension funds.

What is QROPS?

A Qualifying Recognised Overseas Pension Scheme (QROPS) is a non-UK pension scheme that has been recognised by HMRC as acceptable to receive transfers of tax-relieved UK pension benefits. QROPS are administered and arranged locally, or are established in one of the key QROPS centres of Malta, Gibraltar or Isle of Man. You can consolidate several UK pensions into a single QROPS arrangement, making them easier to administrate and potentially saving significantly in fees and charges. Like UK pensions, QROPS can be held in a single name only.

The key advantages of QROPS

Currently, QROPS pension holders are allowed to take up to 30 percent of their pension as a tax-free sum, provided that they have already spent more than five tax years resident outside the UK. This is, broadly, due to the fact that the rules surrounding pension entitlements are based on those of the country in which you now receive your pension and currently the 70/30 rule (70 percent of the fund must be used to secure a pension income). This compares with 75 percent for UK residents. As of 6 April 2017, the 70/30 rule will be scrapped; from that point, a non-UK pension must pass two tests to remain classified as a QROPS:  a regulatory requirement test and a tax recognition test. The tests are too complex to outline within one article; however, as an example, the QROPS destination of choice (for most) is Malta, which passes these tests with flying colours. As should Gibraltar, once some amendments have been made to local legislation (e.g. providing regulation on the schemes themselves).

Unfortunately, these new rules mean that many existing offshore schemes will fail the eligibility requirements to be classified as a QROPS. Chancellor Philip Hammond has warned that any pension transfer into a scheme that fails these two tests after 5 April 2017 will result in a minimum 55 percent penalty charge being payable.

Why QROPS?

  • With a QROPS, you can avoid inheritance tax on your pension assets as long as your overseas address is considered your main residence at the time of death. In the UK, currently, if the pension holder is over 75 years old at the time of death, the beneficiary of the pension assets will be taxed at their marginal rate of income tax when drawing benefits from the inherited pension assets.
     
  • When set against a defined benefit pension scheme, you have more control and flexibility in taking an income from your pension, which would allow for the structuring of taxation liability. Also, QROPS are exempt from UK income tax. You will normally (depending upon the dual taxation agreement in place) 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 in which you live in and the country in which your QROPS is established. In this case, a withholding tax would be deducted at the source. For those with a large pension, some thought should be given to the best country to make your home based on the local tax rules. 
     
  • You are not expected to purchase an annuity at retirement, which is often at high cost and low yield. While it is now the case in the UK that an annuity is not compulsory, older pensions may already be tied or will enter into an annuity as a default. If your pension is transferred into a QROPS, you will avoid this potential annuity trap. 

  • You are able to take your pension income in local currency, avoiding costly foreign exchange charges. You can invest your QROPS pension in your local currency in order to remove the element of currency instability completely. UK pension holders in other countries must take into account the exchange rates when they are receiving or drawing income from their funds — this can mean a substantial fluctuation in income from month to month. 
     
  • Set up properly, a QROPS is transparent when it comes to charges and fees and are often run on a fixed-fee basis. 
     
  • 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.
     

As mentioned above, the advantages of QROPS will be further enhanced by the removal of the 70 percent rule for those offering QROPS and the introduction of flexible access rules that pension holders in the UK have enjoyed since April 2015. Previously, any scheme provider outside of the EU was required to ringfence 70 percent of their tax-relieved funds to provide retirement benefits. This rule will be removed as of 2017, allowing more flexibility for providers.

As long as the non-EU scheme qualifies, the pension holder will soon have much more flexibility in the way they take their pension income, including drawing down the entire amount, taking a regular income or in lump sums as they prefer. Previously this only applied to QROPS based in the EU.

QROPS and defined benefits schemes

Defined benefits, or final salary schemes, 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 (Pension Protection fund applies, but protection is capped), may mean that there is an argument for you to consider a transfer out of your scheme. 

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.   

It is clear that consolidating and transferring a pension to your new home could make great financial sense, but it could also dramatically simplify your pension administration processes and allow you to avoid some of the investment management issues associated with maintaining pension assets in the UK.

Pension transfer

QROPS Warning

Finally, as someone who has come across hundreds of expatriates who have made a transfer to QROPS, I would urge you to insist that your adviser structure your QROPS on a fee-only basis with no minimum investment period and no lock-ins/exit fees. Also, check to see how they are regulated and how qualified your adviser is. If possible, work with an adviser that holds Chartered Financial Planner status. Chartered Financial Planner status is awarded by the Chartered Insurance Institute in the UK to advisers who have reached a high level of professional qualification in financial services, and have worked for a minimum number of years practicing as a Financial Planner. Chartered status should be taken as more of a quality indicator rather than an assumption that the advice provided is regulated by the UK FCA.

 

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 / Expatica


Russell Hammond is Expatica's finance expert and an Investment & Pension Advisor at AESInternational. 


 

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