UK pension holder’s guide to QROPS: South Africa

Now home to over 200,000 UK expats, South Africa is fast becoming a popular retirement haven for British pension holders.

Many of the most important decisions when making any move abroad are financial, and for workers or retirees, pensions need to be at the top of the list, so that an individual can enjoy their retirement abroad in the most profitable manner.

Pensioners who either live in South Africa, or are planning to, should consult with an experienced independent financial advisor to consider transferring their fund into a QROPS – or Qualifying Recognised Overseas Pension Scheme.

QROPS and HMRC-recognised pension schemes based outside the UK.

Although there are some QROPS based in South Africa itself, choosing a foreign jurisdiction to base your QROPS in – including Jersey, Gibraltar and Guernsey – bestows many tax benefits, as discussed below.

QROPS benefits also include selecting investments from a much wider choice of asset classes, receiving your pension income in the currency of your choice, benefitting from more flexible drawdown rules and the ability to pass on 100% of your fund to your loved ones upon death (rather than face the UK ‘death taxes’ – which can be as high as 55% of the fund).

Tax in South Africa

If your pension stays in the UK, your pension payments would usually be taxed as earned income.

Most of the time non-UK residents are subject to UK income tax on income sourced in the UK, charged at the person’s marginal UK tax rate (the current top rate of tax is set at 45%).

And whilst South Africa has a Double Tax Treaty with the UK, usually pensions paid to a South African resident are taxable in South Africa – which can be as high as 40%.

This is why Gibraltar has become a favourite QROPS destination for individuals living in South Africa, as the island holds a low income tax rate of only 2.5% on pension income.

Taxes on death

If your pension remains in the UK, any lump sum death payments made to your beneficiaries before reaching 75 years of age is no longer subject to UK Inheritance Tax (IHT).

Yet if the lump sum is paid after age 75, or when the pension owner has begun to draw pension income, the fund will be taxed at 55%.

In addition, if the pension lump sum is paid after 75 years of age, it will suffer 40% IHT.

Yet by transferring your fund into a QROPS, you can protect your fund from the UK IHT, and in addition suffer no IHT in Gibraltar.

Due to the complexity of the issues at stake, it is preferable to talk through your options with a regulated independent financial advisor (IFA) or a tax planner. They can situate your liabilities, discuss the best option for your needs, and if preferable (in the case of an IFA), complete the QROPS transfer for you.