Qualifying Recognised Overseas Pension Scheme (QROPS) have not lost their lustre for expats despite the forthcoming easy access rules giving onshore retirement savers more freedoms to take and spend their cash.
The Treasury has confirmed that the new rules will also apply to QROPS – but everyone has to wait and see exactly how they will affect offshore pensions when the final wording is drafted.
However, QROPS still have to massive tax aces to play for expats and workers from overseas that have accrued UK pension rights but left the country permanently.
Many QROPS pensions have a special clause written into the small print that allows a retirement saver to draw down a 30% tax-free lump sum on retirement.
If QROPS follow onshore pensions, this will be from age 55 after April 6, 2015.
QROPS 30% tax free lump sum
That means anyone with an onshore pension pot of £150,000 is limited to a 25% tax-free lump sum – which adds up to £37,500.
However, an expat or international worker can take that extra 5%, which means a tax-free lump sum of £45,000 on the same amount of savings.
Taking any further drawings means paying income tax on the balance of a UK pension at the retirement saver’s marginal rate. Assuming our saver pays tax at 40%, then the likely tax bill on the remaining £112,500 in the fund would be £45,000.
This is where the QROPS saver can play their second tax ace.
Their income tax will be at the marginal rate in the country they are tax resident. That could range from zero in Dubai or 2.5% in Gibraltar to much more in Spain or France.
QROPS refugees
With some shrewd tax planning, willingness and the financial resources to move to Dubai, it would be possible to draw down the entire £150,000 tax free.
The British government is probably thinking carefully about anti-avoidance clauses in the easy access rules to stop an exodus by pension refugees who will see the financial positives about switching their cash into a QROPS, drawing down their cash paying little or no tax and then moving back to the UK.
Some rules already exist that cater for treating a QROPS the same as a UK pension if the retirement saver returns home – but they were drafted before the easy access rules were announced by Chancellor George Osborne and are not designed to deal with the new measures.
