QROPS Advice: Advice for expats

British expats abroad can now get more control over their pensions plans, thanks to new rules that remove many restrictions for people who retire overseas.

They can pay lower tax on income drawn from a relatively new form of pension, avoid being forced to invest capital in an annuity which dies with the purchaser and pass their wealth to friends and family free of tax on death.

Needless to say, these important new opportunities are subject to extensive legislation, which will be discussed in detail later. However, the important point for now is that a Qualifying Recognised Overseas Pension Scheme (QROPS) can enable savers to enjoy the best of both worlds.

Portugal You can receive valuable tax reliefs while working and saving toward retirement in the United Kingdom, without needing to pay higher taxes when you draw benefits or submit to UK restrictions on how you invest and spend the fund.

What is a Qualifying Recognised Overseas Pension Scheme (QROPS)?

As its name suggests, this is a form of pension based outside the UK which is recognised by the British authorities as being eligible to receive transfers from registered UK pension funds. Reputable advisers will only recommend transfers to countries which provide consumer protection equivalent or greater than the safeguards in the UK.

People who are living inside or outside the UK can transfer their deferred company and personal pensions to a QROPS. Any pension can be transferred as long as an annuity has not been purchased or, if it’s a final salary scheme, that the pension has not commenced.

Better still, where the pensioner has not been resident in the UK for five complete and consecutive fiscal years – and the tax rules determining residence will be examined in detail later in this guide – HMRC restrictions on how income and capital are spent no longer apply.

For example, as set out in Clause 2 Schedule 34 of the Finance Act 2004, there is no need to report what HMRC would regard as “unauthorised payments” and tax of up to 82 per cent that might be levied on such payments in the UK can be avoided. However, it is important to understand this does not mean trust busting is acceptable.

Who might benefit from considering a QROPS?

Anyone considering retiring overseas and becoming resident in a foreign jurisdiction or country for five years or more. The amount of tax you pay on income and capital received from your QROPS will be determined by the taxation of the country in which it is based and you are resident.

These laws or fiscal statutes vary from country to country but many are more favourable to pensioners than those in the UK.

For example, pensioners resident in Cyprus can opt to pay a fixed flat rate of five per cent tax on all income above a small tax-free band or personal allowance; alternatively, they can choose to receive a higher personal allowance and pay higher rates of income tax on any income in excess of the allowance.

The best option for you will depend on your personal circumstances and it makes sense to take professional advice which can take account of your individual needs and objectives.

British pensions that can be transferred to a QROPS include former employers’ occupational schemes (but not final salary or defined benefit schemes already in payment); Superannuation Schemes; Executive Pension Schemes; Self Invested Personal Pension Schemes (SIPPSs); Small Self Administered Schemes (SSASs); Section 226 Personal Pension Schemes; Section 32 Pension Transfers and Personal Pensions.

You cannot transfer British Government or State pensions to a QROPS.

Do I need to leave the UK forever to benefit from QROPS?

No. Rising numbers of people who decide to retire overseas – perhaps to enjoy better weather and a lower cost of living – can take advantage of a QROPS. You can continue to visit friends and family or return to Britain for any reason, provided you remain a non tax resident of the UK. So, you could return to the UK whenever you wish but the maximum length of time you can spend in Britain will be limited before UK taxes apply.

For example, you must beware of the six-month rule and the three-month average rule to avoid becoming resident in the UK again for tax purposes and losing the advantages of QROPS.

If you are present in the UK for 183 days or more in any tax year – which starts on April 6 and ends on April 5 – or you are present in the UK for an average of 91 days or more per annum, measured over up to four years, then you may become resident in the UK for tax purposes.

But be careful because, these days, rules are not the law. It is possible to remain a UK tax resident even if you spend less than 90 days in the UK, so it makes sense to take advice that is specific to your individual circumstances in this very tricky area.

Since April 6 2008, if an individual is present in the UK at midnight, that counts as one day’s residence. In practice, days of arrival in the UK are counted but days of departure are discounted. Where an individual arrives and departs on the same day, this will not count as a day’s residence for tax purposes.

Are QROPS suitable for everyone?

No. Most British pensioners retire as UK residents and so must pay UK tax. There is no statutory limit on the minimum value of pensions that can be transferred to a QROPS but only funds worth more than £100,000 are likely to generate sufficient tax savings to justify set-up costs, which vary between one per cent and five per cent of the fund transferred.

Pensioners who have plans or policies with Guaranteed Annuity Rates (GARs) higher than returns available today, may also find QROPS do not justify giving up their GARs. As mentioned earlier, Government pensions – excluding the National Health Service scheme - British State pensions and final salary or defined benefit pensions already in payment cannot be transferred to QROPS.

Why it makes sense to take specialist advice

Given the complexity and variety of different countries’ tax laws, this guide can only serve as a general introduction to the new opportunities created by QROPS. Specialist financial advisers, who are authorised in the UK and the country to which you intend to retire, can answer questions specific to your individual circumstances.

Remember that the fundamental purpose of a pension is to provide retirement income. So, it is vital to ensure that your money does not run out before you do – and to avoid taking unnecessary risks with your income or capital. For these reasons, it makes sense to consult fully-authorised, specialist advisers before making any decisions about QROPS.

But the first step for most people will be to build up the maximum pension they can within the UK’s tax rules, and this is the subject of the next chapter.

Remember that the fundamental purpose of a pension is to provide retirement income. So it is vital to ensure that your money does not run out before you do – and to avoid taking unnecessary risks with your income or capital.
By Ian Cowie
http://www.telegraph.co.uk/finance/personalfinance/offshorefinance/7188812/QROPS-and-pensions-advice-for-expats.html