It is essential that British expats understand Qualifying Recognised Overseas Pension Schemes. QROPS allow expats to carry their paid up UK pensions overseas. You are entitled to this option as long as you have permanently settled outside the UK or intend to do so in the next 6 months.
What is QROPS?
QROPS stands for Qualifying Recognised Overseas Pension Scheme. This is a scheme set up by HMRC to enable British non-residents to transfer their assets from a UK registered pension scheme to an HMRC recognised scheme abroad. To make it simple, money you have built up in a UK based pension scheme can be transferred, tax-free, to another HMRC approved scheme.
QROPS have two easily identifiable tax benefits:
No tax on transfers: Before it came into force in April 2006 it was almost impossible to move a UK pension plan overseas without paying tax on the transfer. With QROPS, a non-resident can transfer their pension overseas with no tax liability.
Tax on drawing money: Depending on your place of residence, taking money out can be tax-free also. HMRC have no jurisdiction to tax a British non-resident if their pension is overseas.
Deferral: British pension plans are notoriously inflexible. Once you reach 75 you can no-longer delay taking an income from a UK based pension, so you must either purchase an annuity or take an ASP (Alternatively Secured Pension). It is worth noting that in the UK, pension annuity rates are currently at their lowest for 15 years, having declined by over 45% since 1994.
Almost all offshore pension plans are fully flexible, allowing you to retain ownership of the asset.
Inheritance: There are severe restrictions when passing a UK pension fund on to heirs. Depending on which plan you have, and how money has been drawn from it, leaving it to your heirs can result in a plethora of tax issues. Lump sums can be liable for inheritance tax at 40%. Worse still, payments can result in scheme sanction charges and unauthorised payment surcharges which often result in tax liabilities of 80% or more. QROPS offer a wide variety of options; including passing assets on directly, investing assets for beneficiaries later in life and more.
UK pension schemes are held and paid in Sterling. For a non-resident this will translate to extra exchange rate costs. This also leaves them open to currency fluctuation risks which have dramatically and negatively affected the lives of many retirees abroad. A QROPS pension can be held in many denominations, income payments can thus be in the local currency.
In UK schemes the ‘Lifetime Allowance Charge’ is a restriction on the total permissible value of an individual’s pension fund. Currently this is £1.8 million and you may be liable for a tax of 55% on anything above this. Non-UK schemes are unlikely to have a top ceiling. Indeed many offshore schemes encourage further investment. Most QROPS schemes have many of the features of an offshore portfolio bond, from the ability to create a bespoke investment strategy with your IFA, to the freedom to add lump sums to your plan at will.
Clearly, QROPS has a number of benefits; a competent financial adviser will be able to tell you which, if any, of the features of QROPS you will be able to benefit from.