A cut in the Australian official interest rate are already having an effect on exchange rates – and the value of QROPS pension transfers.
The Reserve Bank of Australia dropped the rate from 2% down to 1.75% on May 3 – the first rate change in a year.
Timing QROPS pension transfers from Sterling into a foreign currency is always important as the transaction is affected by the comparative strengths and weaknesses of the paired currencies.
Within hours of the rate cut, the Australian dollar climbed to $1.94 against the pound.
What a strengthening dollar means to pensions
A strengthening Australian dollar means the currency is increasing in value against Sterling and a dollar buys more pounds.
If the rate cut weakened the dollar, then the opposite applies – Sterling buys more dollars.
For expats switching pensions, the value of their pension denominated in Sterling shrinks on exchange into Australian dollars as the currency rises, but rises as the dollar falls.
Exchange rates also impact on pension payments.
Expats with pensions still based in the UK can only take the money as Sterling.
To receive their benefits in Australian Dollars, somewhere along the line they gain or lose according to exchange rates.
Smoothing exchange rates
Choosing a QROPS denominated in Australian dollars removes the problem once the fund is transferred from the UK to the new provider.
When the fund pays benefits, the payments are in dollars and unaffected by foreign exchange rates.
Smoothing exchange rates is not the only reason for expats to transfer their UK-based pensions into a QROPS.
UK pensions pay a tax-free lump sum restricted to 25% of the fund. Many QROPS out of the 1,134 available across 41 countries lift this limit to 30% -an uplift of 5% of the fund value as tax-free income.
QROPS are also exempt from UK lifetime allowance rules once the fund has left Britain. For savers this means the fund is tested against the lifetime allowance on transfer. Providing the value is below the current limit of £1 million, no tax is due.
If the fund grows to exceed £1 million, no tax penalties are due.
These are just some of the benefits for expats who switch from a UK pension to a QROPS. The same benefits also apply to Australians who have worked in the UK and have a frozen pension.
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.
