IFAs and financial firms like to draw the attention of expats to the tax effectiveness of a Qualifying Recognised Overseas Pension Scheme (QROPS) – but what does this mean?
The first point to bear in mind is pretty much all the 1,100 or so QROPS worldwide are built on the same regulatory template, so they all follow the same tax rules.
The subtle differences in taxing QROPS income comes from the tax relationships between the place where the pension is administered and where the pension member is tax resident.
The country to country tax relationship is governed by the rules of any tax agreements between the governments, such as double taxation treaties (DTT).
If they have DTTs, then the terms of the treaty detail how much, if any, income tax is paid on pension benefits.
Default tax scenarios
The idea of a DTT is that income paid in one and taxed in one country is not taxed again in another.
Close to 1,300 DTTs are agreed between governments worldwide.
The pension regulator in the financial jurisdiction where the QROPS is administered will have a default tax scenario.
For example, Gibraltar has a 2.5% income tax rate on QROPS pension payments and Dubai has no income tax.
So an expat living in Dubai with a QROPS based in Gibraltar is likely to have income tax at 2.5% deducted at source by their pension provider, while no income tax is paid in Dubai.
Setting tax residence is all important
You can see from this example the tax effectiveness of a QROPS depends on where an expat is tax resident.
This makes proving tax residence important for QROPS retirement savers from the outset.
Expats away from the UK on temporary assignment for a few months or even a few years who have a home and life to return to in the UK may consider themselves expats but remain UK tax resident.
Third party QROPS, like those provided in Gibraltar, Malta and the Isle of Man make life easier for expats who have not yet decided where they will live but know they will not return to Britain.
These QROPS make pensions portable and take them out of the reach of the grasping UK tax system.
Further QROPS Information and Guidance
For more information about QROPS and the benefits it provides, download the iExpats QROPS Guide or complete the Get Advice form.
