If it’s worth more than £75,000 it’s certainly worthwhile exploring the options open to you. You could pay less tax, retire earlier and have money available in retirement.
A QROPS? What’s that?
If you are thinking whether you should transfer your pension away from the UK, what you are looking for is a QROPS.
As we’ve mentioned before, QROPS stands for Qualifying Recognized Overseas Pension Scheme. Basically, one of the agreements of the EU is that citizens have a right to move their savings between countries. And a pension scheme is a form of savings, so citizens should have the right to move it abroad. But unlike, say, a savings account, a pension is wrapped inside fairly complicated rules regulating how long you have to contribute, how much you can withdraw, how much tax you pay in each situation, and so on. So in 2006, the UK regulated which foreign pension schemes (and in fact, it included several non-EU countries) have ‘acceptable’ rules, and allowed UK pensions to be transferred to them. And it called them QROPS.
OK, so why should I transfer my pension to a QROPS?
If you are no longer living in the UK, and don’t intend to return, a QROPS has several advantages vs. keeping your UK pension:
UK pensions are taxed at source or upon death at rates of up to 45%. While you now can access 100% of your pension thanks to recent rule changes, you do still face some restrictions on the types of investments you can access.
QROPS on the other hand are taxed according to your tax residence, and aren’t taxed upon death after the age of 75. At current life-expectancies that can make all the difference! They also allow for a broad range of investments. So if you are tax-resident in a jurisdiction with a lower rate, you will most likely have substantial financial benefits.
QROPS do also have some drawbacks, though. While UK Pensions allow you to take a lump-sum of 25% tax-free, in the case of QROPS that varies according to jurisdiction. And while you can access 100% of your pension, only EU-based QROPS allow that – in other jurisdictions most of your funds have to go towards providing a life-time income.
And of course, you must weigh the benefits of the lower tax burden against costs or lost income you might have in moving. If your policy has exit penalties, for instance, take those into account. If your policy has attractive guaranteed rates or bonuses or especially if it is one of those increasingly rare defined-benefit policies, then transferring could mean missing out.
So the question is not ‘Should I transfer my Pension?’ but ‘Can I transfer my Pension?’
To be able to transfer your pension to a QROPs:
- Although you can transfer your pension to a QROPS if you do live in the UK, it makes most sense if you have been tax-resident outside the UK for 5 years or more, otherwise you won’t have the tax exemption. This is something to watch out for, as the rules for tax-residence can be tricky. Rather than assume that you are not tax-resident simply because you lived abroad, it is best to talk to a tax specialist.
- It cannot be a state pension.
- You cannot have purchased an annuity or, if it’s a final salary pension, started receiving payments.
- You need to transfer to a jurisdiction that accepts pension transfers from abroad and that has QROPS which fit UK regulations. The Channel Islands and the Isle of Man, Malta, Gibraltar and even Hong Kong are some of the most popular jurisdictions, and we’ve discussed some of their pros and cons. There are also several others. But some can be problematic – for various reasons, you can’t really transfer to the USA, for example.
But I’m not an expat! Can I and should I transfer my pension?
The big tax advantages of QROPS are available only to non-UK tax residents, unfortunately, and that is the case we have focused on in this article.
But if you are UK-resident and what you are looking for is more flexibility in your investments, a cheaper plan or the possibility of consolidating your pension pots, you might want to consider the option of a SIPP. You can learn more about those here.