Expats taking large amounts under pension freedoms from their UK retirement saving face unwelcome demands from the tax man.
Two unfortunate consequences have combined to complicate the income tax they pay.
First, British workplace or private pensions are paid in Sterling with tax deducted at source by onshore pension providers.
Next, the tax is worked out under the PAYE system, which was not designed for pension drawdown and can easily put pensioners into a higher tax bracket unnecessarily.
These two factors combine to make pensioners pay more tax that they have to reclaim from HM Revenue and Customs (HMRC) – which leaves them without their cash while the claim is sorted out.
How tax rules trap pensioners
So, if a retirement saver takes £15,000 from their pension, the payroll system assumes they will take the same amount every month, giving an annual income of £180,000 and deduct the tax accordingly at 45% from the £15,000.
If the pensioner is a basic rate taxpayer only receiving the flat rate state pension of £8,060 a year, adding £15,000 means working out the tax by adding the two sums together to make £23,060.
The personal allowance is deducted and tax charged at 20% on the balance.
To get the difference between the basic and additional rate tax back, the pensioner has to file a form with supporting documentation with their tax office or wait until the end of the financial year and make the claim through a self-assessment tax return.
Either way, the claims can take several weeks to process and mean they are without the money for that time.
HMRC explained the system is under continual review but no changes were expected to iron out these flaws.
Beating HMRC with a QROPS
“The claim procedure is simple and effective if someone believes they have wrongly paid too much tax,” said the spokesman.
One solution for expats is a Qualifying Recognised Overseas Pension Scheme (QROPS).
These offshore pensions accept transfers from UK direct contribution schemes but not the state pension.
Malta QROPS are currently the only QROPS that can pay out under pension freedom rules, and only a limited number of schemes on the island are equipped to do so.
They also pay gross without income tax deducted and in a currency of the expats choice.
Lastly, they will also accept transfers from expats living outside Malta.
At a stroke, Malta QROPS do away with the tax pitfalls of flexible freedoms.
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.
