Expats worried about the new transfer charge on the expat Qualifying Recognised Overseas Pension Scheme (QROPS) have an option to avoid tax on their savings.
New rules could see expats paying a transfer charge of 25% of the fund value when switching their retirement savings if they move the money to a non-workplace QROPS outside the European Economic Area (EEA).
The transfer charge applies if an expat or the QROPS move up to five tax years after the offshore pension was started.
Although the measure hits a relatively low number of QROPS out of the average 13,000 transfers a year, the financial impact on individuals can be significant.
One alternative is a self-invested pension plan (SIPP).
Savings boost with a SIPP
The big boost that comes with a SIPP is that any transfer from another pension is a transfer within the UK and the 25% transfer charge that impacts a QROPS does not apply.
The templates for a SIPP and a QROPS are similar – except for QROPS are offshore schemes and SIPPS are onshore pensions generally considered more suitable for British taxpayers due to the relief afforded to contributions.
SIPPs are available for expats but the features and disadvantages include:
- No tax relief on pension contributions for non-residents – but this is only an issue for younger expats still making putting money aside for their retirement
- SIPPs are subject to the £1 million lifetime allowance cap, unlike QROPS which have no fund size limit
- SIPPS come with the option of pension freedoms for retirement savers aged 55 or over, which means some or all the fund can be taken as cash
- SIPPS have a 25% tax-free lump sum limit
- Once drawdown starts, the annual contribution limit drops from £40,000 to £4,000
Solution does not suit everyone
Other issues for expats might include dealing with foreign currency exchange rates as they typically pay in sterling and investment constraints of UK pensions compared with QROPS.
However, SIPPs are outside UK inheritance tax rules like QROPS and have the bonus of portability if an expat moves back to Britain.
SIPPs are not a retirement solution for every expat, but do offer an alternative to those considering a QROPS transfer.