If you have a UK pension and now live overseas, you have probably heard of the many different rules, regulations, schemes and jargon that can be used to lower your tax burden. It’s easy to get lost in the details, so let’s go over just one of the most important choices that could make retirement a little easier for you – whether to move your UK pension to a QROPs.
Transferring your pension to one could mean huge tax savings and more flexible investment options, but it’s important to watch out for a few catches.
First, let’s go over the basics.
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.
The key point here is that the rules are ‘acceptable’, but not the same as those in the UK. So you can just choose which set of rules work best for you. So let’s compare some of the important ones.
|UK Pension Rules||QROPS Rules|
|Income is taxed at source at rates of up to 45%||QROPS Income is not subject to UK income tax at source. So income tax depends on the jurisdiction of the scheme and your country of residence, and can be low or nil|
|Upon death, tax of up to 45% applies, regardless of age||No tax on benefits passed on upon death after the age of 75 – significant considering current life expectancy rates|
|Restrictions on types of investment (even in the case of a SIPP)||Broader range of possible investments|
|You can take a lump-sum of 25%, tax- free||You can take a tax-free lump sum at retirement. The amount depends on the QROPS scheme you use|
|Thanks to the new flexibility rules, you have access to 100% of your pension||QROPS in the EU currently offer this. Outside the EU, at least 70% of the fund’s value must be used to provide an income for the beneficiary|
|Pensioners’ rights are strongly protected by the UK government||Pensioners’ rights and protection vary according to jurisdiction|
There are also some rules on what kind of pensions can be transferred and what happens when they are:
- State pensions cannot be moved.
- Pensions cannot be moved once an annuity has been purchased or, if it’s a final salary scheme, if payments have commenced.
- For those with larger pensions, a QROPS transfers a benefit crystallisation event and can ring-fence monies against taxation as/when exceeding lifetime allowance.
Well, should I transfer to a QROPS?
Essentially, it comes down to your tax residence. If you are tax-resident outside the UK for more than 5 years, then the answer most likely is yes, because your QROPS can be in a low-tax jurisdiction – it needn’t be based where you live.
But watch out! If it turns out you were tax-resident in the UK after all, your QROPS transfer may be deemed an ‘unauthorised payment’ and heavily penalised. The rules for determining tax-residency are very specific. The most well-known ones are that you must not be in the UK for more than 6 months in any given year, or more than an average of 3 months per year over 4 years. But there are other situations in which you could be deemed tax-resident too, even if you satisfy those rules. Don’t make assumptions – consult a tax specialist.
Just as important as whether you should transfer, is the question of where you should transfer to, and to what QROPS schemes.
Taxation, flexibility in accessing your funds, and the protection of your rights as a pensioner all vary according to the jurisdiction and scheme of your QROPS. So getting this part right is as important as deciding whether to transfer at all. In our next post, we’ll go over the pros and cons of specific locations.