Pensions are complicated and many expats are confused about the benefits of switching their UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS), based, by definition, outside the UK.
QROPS can provide a secure environment for growing pension cash for many expats, but many are unaware of the tax and financial advantages they can offer.
What is a QROPS?
A QROPS is a pension based in an offshore financial jurisdiction, such as Malta, Gibraltar, Isle of Man, as well as the Channel Islands.
The pension is similar to a self-invested personal pension (SIPP) in the UK.
Who can take out a QROPS?
A QROPS is available to British expats who live permanently overseas or to any Non UK resident who retains a UK Pension after relocating back to their homeland. Non-British citizens who have lived and worked in the UK at some time and saved into a pension can also transfer these Pension assets into a QROPS.
British residents can access a QROPS, but they are primarily available to Non UK residents. UK residents should consider a QROPS if they intend to leave the UK permanently.
Expat is a confusing term, because someone who is tax resident in the UK but living and working abroad may consider they are an expat.
For QROPS, the term is intended to mean someone who is now Non-Resident in the UK, not temporarily absent.
Which pensions can an expat transfer into a QROPS?
Expats cannot transfer all their pension savings into a QROPS.
The excluded pensions are:
- The State Pension
- Public sector pensions, such as those belonging to NHS workers, teachers, police, council workers or members of the armed forces
- Civil Service pensions, such as those belonging to Crown servants, diplomats or government officials
How do I choose a QROPS?
Most QROPS providers do not deal direct with retirement savers. Instead, they expect them to be referred from a suitably qualified and experienced international IFA.
The IFA completes a report about your personal finances, including the transfer of any pensions, your target retirement age and attitude to investment.
The IFA then compares your financial goals and comes up with a short list of recommendations.
The IFA should tailor the choice of QROPS and investments to your financial aspirations.
At the time of writing, in April 2016, 1075 QROPS were offered across 41 financial jurisdictions.
QROPS benefits for expats
Transferring money from a UK pension to a QROPS can make a lot of financial sense for expats.
QROPS do offer the following features;
- More tax-free cash - Up to 30% Pension Commencement Lump Sum compared to 25% in the UK
- More investment choices – Access to funds, commodities and currencies in money markets around the world unavailable to UK pension savers
- No tax deducted from pension payments – Depending on the chosen QROPS jurisdiction and the effective Double Tax Treaties in place, QROPS providers pay benefits gross, not net, although tax may be due on the payment in the country where the pension member lives.
- No more exchange rate juggling – QROPS can pay benefits in a wide range of major currencies.
Consolidating several pensions
Expats can save pension charges by consolidating or merging several UK pension funds into a single QROPS.
Any expats with older QROPS wanting to upgrade to a more modern pension can also consolidate funds into another QROPS.
QROPS are not just for the super-rich
HMRC rules do not place any limits on the minimum size of a QROPS fund transfer.
Many providers do not consider transfers of less than £40,000 on the grounds that set-up and ongoing administration fees are too high for a small pot to sustain.
However, some specialist providers will accept transfer ranging from as low as £20,000 into QROPS with low set-up and ongoing charges. Typically, these QROPS will have fewer features and will have a narrower choice of funds.
Can I take cash under flexible access from a QROPS?
The UK government limits flexible access to QROPS based in the European Economic Area (EEA), which is the European Union plus Iceland, Norway and Liechtenstein.
Malta is the only financial jurisdiction to offer QROPS flexible access, and is available through a number of advisers.
QROPS outside the EEA must safeguard 70% of the fund to pay the pension member during retirement.,
HMRC are currently conducting a review of the Non EEA/ EU Schemes with a view to potentially introducing flexibility at some stage.
Where I live has no QROPS provider
This is not a problem as many providers offer “third country” QROPS. These pensions are headquartered in one financial jurisdiction while the pension member lives elsewhere.
For example, the United Arab Emirates has no QROPS providers, but British expats in Dubai can transfer their UK funds to somewhere like Malta, draw a 30% lump sum and a regular income or draw down their entire fund tax-free with a third-party pension, although there are risks to this strategy, which should be discussed with your IFA.
The example assumes tax residence in the UAE, where the income tax rate is 0%.
QROPS and tax avoidance
Despite recent publicity around offshore money and tax avoidance, QROPS are legal and closely monitored by HMRC.
QROPS can be tax efficient, and are not tax avoidance schemes.
Opening a QROPS is regarded as no different from opening a SIPP or any other pension in the UK.