Expats need to consider if a QROPS pension, short for Qualifying Recognised Overseas Pension Scheme, is right for you if you are a British Expat or international worker with UK pension rights who has taken the decision to live away from the UK permanently – or you are looking at your retirement options abroad.
This article aim is to give you a basic understanding of what the benefits are and why they are so popular.
QROPS pensions are often called ‘offshore’ pensions because the providers work from financial centres outside the UK, as opposed to ‘onshore’ pensions which are UK based.
More than 2,000 schemes are available around 50 countries, so the choice is vast and is generally tailored to the personal financial circumstances of the investor and the tax rules of the country where the scheme is run from and those of the country where the expat is resident.
Because of local laws and other business or administrative reasons, although all Qualifying Recognised Overseas Pension Schemes are based on the same HMRC tax and financial template, some of the conditions and benefits vary between countries or even providers in the same country.
Always check with a regulated and experienced financial adviser for the latest scheme and tax information. With that in mind, here’s a look at the reasons why you might want to invest in a QROPS:
Lump sum flexibility
Most onshore pensions limit the cash lump sum available to 25% of the fund value, but many QROPS can stretch that to 30% providing the scheme keeps 70% of the original transfer pot to provide a retirement income.
Local pension rules determine if part or all of the growth in funds is available as a cash lump sum.
For example, if £120,000 was transferred in to a Qualifying Recognised Overseas Pension Scheme and the fund grew to £150,000, a quarter of the original transfer – £30,000 – is available as a cash lump sum. The country where the QROPS is based and the rules of the specific scheme would determine if any more cash could be paid as a lump sum.
Income flexibility
The rules about drawing an income from a are similar to those governing onshore pensions.
UK pension providers use the GAD tables to calculate the amount available to you. The amount of drawdown or income paid depends on personal factors, like life expectancy, financial goals and investment performance. This is calculated by the trustee’s that run the schemes and the calculation used is determined by the laws and rules in that jurisdiction.
Some jurisdictions use very similar methods to the UK so a similar amount would be available.
Estate and succession planning
Any funds left in a Qualifying Recognised Overseas Pension Scheme on the death of the investor can be passed on tax-free to the beneficiaries of the estate, providing they live outside the UK.
The investor has no obligation to draw any payments immediately, so can leave the pension fund intact to pass to family or loved ones. However, generally at age 70 or 75 he must start taking some benefits.
After 5 full years of non UK tax residence funds in a Qualifying Recognised Overseas Pension Scheme are generally outside of the reach of UK inheritance tax, although the country where the investor is resident at death may exact some form of tax.
Income tax on payments
If you live in the same country where your QROPS is based, payments will be taxed according to local rules.
If you live in a separate country to where your QROPS is based, tax on payments depends on whether the country where you live and the country where your QROPS sits has a tax treaty. If they do, there may be some tax breaks available to you.
It is very important to marry up correctly your country of residence and the location of your Qualifying Recognised Overseas Pension Scheme. An experienced adviser can help you to achieve this.
Another option is to use a company that offer multi-jurisdictional schemes, which means the location of your QROPS can be moved to different jurisdictions by the same provider. This can reduce the cost of exit and entry fees.
Beating exchange rate fluctuations
A UK pension can only pay out in Sterling, regardless of the currency of the place where you live, so you face complicated timing issues to make the best of ever changing currency rates.
However, a QROPS can invest and pay out in most currencies, reducing exchange rate fluctuations and avoiding the hassle of timing transfers to get the best rate.
A good financial adviser can also get you better currency exchange rates by using a bespoke FX broker.
Investment selection and management
QROPS offer a range of options to suit your investment preferences and attitude to risk – from self-managed funds to managed investments.
The range of investments is much broader than in an onshore pension, offering more currencies, commodities, offshore bonds and access to international markets.
This flexibility offers the chance to match your investment profile to the currency, inflation rate and lifestyle of your new home overseas.
Portability and convenience
They are designed to cater for expats and international workers with a mobile, international lifestyle.
You can base a QROPS in one country and move between others without affecting the underlying investments.
QROPS have no minimum investment rules, although these may vary between providers. Retirement savers can consolidate any number of small, UK pension funds in to one larger and easier to manage QROPS scheme to save charges and maximise potential investment growth.
Some expats may find switching small pension funds may not be cost-effective, and some workplace or public sector pensions may have additional benefits that will be lost on transfer to a QROPS.
Do all offshore pensions qualify as QROPS?
No. HMRC publishes a list of providers who have self-certified their pension schemes meet QROPS rules. Only schemes on this list are regarded as QROPS, although a few schemes have asked for their details to be removed.
Just because a scheme is listed does not mean HMRC has recommended the scheme.
You can download a copy of the list from the HMRC website www.hmrc.gov.uk/pensionschemes/qrops.pdf
Who can transfer funds in to a QROPS?
Anyone with UK pension rights who no longer lives or intends to live in the UK. Expats working abroad temporarily who are still UK residents do not qualify.
Tax and financial planning advice
The implications of cross-border tax planning can have costly, unforeseen consequences. An experienced international financial adviser should have a backup team that can make sure the choices before you are tailored to your personal financial circumstances.
Chris Wright of QropsInvestor.com says, a holistic, ‘whole of the market’ adviser should consider your goals and wishes when selecting the right Qualifying Recognised Overseas Pension Scheme for you, so you have the choice and opportunity to control your retirement options.
Getting advice
This article reviews some of the basic facts, however if you are looking to transfer your UK pension to a QROPS you must seek qualified financial advice.
A financial adviser with QROPS experience will determine whether a QROPS is the best choice for your financial goals, then will guide you through the process. You need to be fully aware of the steps involved before you make the decision.
If you would like to be put in touch with a qualified financial adviser, please contact us via the contact form here for a referral.
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