In a previous post, I discussed why, if you work or live overseas, moving your UK pension into a Qualifying Recognised Overseas Pension Scheme (QROPS) could make financial sense. One of the biggest reasons is because you could pay much lower rates of tax.
There is a wide choice of QROPS available, with trustees based in a number of different jurisdictions, such as the Isle of Man, Gibraltar, Guernsey, Malta and Hong Kong, to name just a few.
Each jurisdiction has different tax rates and mechanisms, and different rules which affect the amount of tax you pay on your UK pension and how your pension is managed. Where you decide to retire and drawdown the benefits plays an important role in selecting the best trustee jurisdiction.
Points to consider are:
- Where you decide to retire: while you don’t have to base your QROPS in the country where you will physically retire, where you choose to live has an impact on what jurisdiction is best for you. Some jurisdictions allow ‘third party QROPS’, meaning you can base your QROPS there and live somewhere else, while others only offer QROPS to residents. Whether your QROPS is based where you live or abroad also determines whether you should be looking for the lowest possible local income tax rates, or the best double-taxation agreements. For instance, a jurisdiction may be attractive for your third party QROPS in spite of high local tax rates, because they don’t apply to you!
- Tax rates: obviously you are looking for the lowest rates, but remember whether you should be looking at the local tax rates or favourable double-taxation agreements.
- Stability: obviously jurisdictions that are politically, legally and economically safe are preferable. If the language and legal system are familiar, that’s also useful, but not essential.
- Safeguards: regardless of their overall stability, some countries have stricter restrictions on what types of investments can be made, and how they can be made, than others. The safeguards reduce risk, but can also limit your flexibility.
- EU Membership: not only does this add an extra layer of safeguards, but means that as a pensioner you can access 100% of your funds, as in the UK, whereas in jurisdictions outside the EU, currently 70% must be used to provide a lifetime income.
QROPS design and regulation: some jurisdictions specifically regulate QROPS, and in fact designed their regulation in close co-operation with Her Majesty’s Revenue and Customs (HMRC) and err on the side of being conservative. Others have tried to keep regulation more flexible in an attempt to attract more investment, and others still have simply applied their own standard regulation, which happens to allow certain pension schemes to qualify as QROPs. As a result, in some cases HMRC has later determined that the some or all of the QROPS in a country aren’t appropriate, and delisted them. You can imagine the resulting hassle for those unfortunate pensioners!
Let’s go over some of the main jurisdictions for UK Pension transfers
Historically Guernsey was a very attractive jurisdiction for QROPS. As a famous offshore centre for all sorts of financial structures, it had low tax, clear regulation and many financial institutions present to offer a broad range of products.
It has, however, become somewhat of a ‘black sheep’ of QROPS. One of the rules for a QROPS is that it must be accessible to local residents, rather than open only to overseas residents. But Guernsey schemes offered better treatment to overseas residents, resulting in HMRC determining that they were tax-avoidance schemes and delisting over 300 of them!
Still, since then the industry has recovered somewhat, and Guernsey continues to provide to provide a range of interesting options. But bear in mind that it is not part of the EU, meaning 70% of your pension would have to provide a lifetime income.
Isle of Man
Income on IoM QROPS is subject to 20% tax, but lump-sum payments of 25% are exempt. Inheritance tax is 7.5%. These rates are less attractive than those in some other jurisdictions, but double-taxation agreements make the IoM an attractive location for third party QROPs if you live in an eligible jurisdiction with lower rates.
As an offshore centre with close ties to the UK, the IoM is stable and transparent, and QROPS regulation is broadly aligned with that of HMRC, although some types of scheme have been delisted in the past, having been deemed tax-avoidance ruses.
As in the case of Guernsey and the IoM, Gibraltar has had some friction with the HMRC over tax. However, in this case, rather than having openly different rules for local and overseas pensioners, Gibraltar had determined that in certain situations the tax-rate for pensioners was 0%, resulting in a prolonged legal discussion with the UK, after which the rate was set to 2.5%.
Income on Maltese QROPs is exempt from tax, as long as it does not come from real-estate in Malta. Taxation occurs when payments are made, at marginal rates of up to 35% (for income over EUR60 thousand), but lump-sum payments of up to 30% are exempt. There is no inheritance tax. It offers third party QROPs and has over 60 double taxation agreements, meaning that if you reside in an eligible country with lower rates, your tax could be even lower.
It has historically been politically and economically stable, and having been a member of the Commonwealth, it’s financial and legal system has similarities to that of the UK. It’s a full member of the EU, and has specific and strict regulation for QROPs, conservatively designed in co-operation with HMRC.
With schemes de-listed in Guernsey, Isle of Man and Gibraltar, Malta has grown as a financial centre for QROPS. As compared to some other QROPS jurisdictions, it is also a relatively attractive place to live, although, for local residents, tax rates are significant (though still lower than those in the UK).
As in other countries, Hong Kong’s QROPS suffered from delisting in the past. Despite this, it continues to be an attractive jurisdiction. HK QROPS pay no capital gains or inheritance tax, provide a 30% tax-free lump-sum and are not vested, which provides further tax protection, and can also be useful in situations such as divorce. However, as a non-EU country, 70% of your pension fund would have to provide a lifetime income, rather than being readily accessible.
As an overall summary, traditional tax-havens such as Guernsey and the Isle of Man have suffered a little when it comes to QROPS but are still alternatives for those looking to aggressively manage their tax bill, whereas Malta is a more conservative alternative. Hong Kong, despite being a less well known destination, can also be attractive and tax efficient.
However, as you can see, choosing the right jurisdiction involves numerous factors and the details of the tax laws and ever-changing regulations of several countries. So I’d strongly advise you to talk to a specialist pension advisor who can give you best advice on the options you have open to you with your UK pension.