The tax man has announced Budget reforms for onshore British pensions are to be extended to Qualifying Recognised Overseas Pension Scheme (QROPS) – but what does this mean to expat retirement savers?
The first point to make is although HM Revenue & Customs (HMRC) is agreeing to apply the new rules to QROPS, the finer details still need working out, so expats can expect some modification to the UK rules.
The most likely area for HMRC to tweak is the amount of tax payable on the balance of a pension fund once the 25% tax-free lump sum has been drawn.
The options are a UK tax rate, a hybrid rate or leaving the income tax to the tax authority where the expat lives.
For expats who have missed the news about pension overhauls in the UK, these are the new rules that should apply from April 6, 2015 – subject to MPs approving the measures which are currently before Parliament.
The new rules
The new rules for QROPS are likely to be:
- Anyone aged 55 or over can withdraw some or all of their pension savings at any time and spend the money how they like
- In the UK, the first 25% of money drawn down is tax-free. Some QROPS jurisdictions allow up to a 30% tax-free draw down, and at this time, the government has not indicated whether this larger amount will still be allowed.
- Tax paid on the remaining 75% of the pension fund will be paid at the retirement saver’s marginal rate – this should be the marginal rate of income tax paid by the QROPS member in the place where they are tax resident.
- Retirement savers can draw down their pension as they wish – leaving some or all invested to draw down over time
Other changes are also in the pipeline. Chancellor George Osborne has indicated that once a retirement saver has drawn from their pension, the annual contribution threshold will drop from £40,000 to £10,000.
Final word awaited
Again, the statements from HMRC are unclear about how this measure may affect QROPS pensions, if at all.
HMRC has put no date on when QROPS investors are likely to find out the detail about how their drawings will be taxed and if limits will be placed on contribution or transfer amounts.
“We are aware that QROPS are affected by the new pensions overhaul and are working out exactly how the rules will change for these pensions, although we are not ready to make an announcement at the moment,” said a spokesman.
Question…. Would someone living in a tax free location (such as for example Dubai) with a ‘marginal tax rate’ of zero, be able to take their entire pension as a lump sum free of tax? (Assuming it was already offshore in a QROPS) If so, what would be the implications if they were to return to living in the UK after several more years had elapsed?
I have the same question as Steff – although I am not interested in the returning to the UK aspect. Since Osborne made his announcement I have been waiting for the small print – and I’m still waiting.
Just to add though that Gibraltar could not get away with a zero rate of tax. It was agreed with HMRC that a rate of 2.5% would apply in order to receive authorisation. How can Dubai get away with zero?