Expats with Qualifying Recognised Overseas Pension Schemes (QROPS) remain unaffected by Chancellor George Osborne’s new pension changes.
As retirement savers at home face a massive pension upheaval following Budget 2014, nothing has really changed for QROPS investors.
However, Osborne’s new ideas for direct contribution pensions might have an impact on future transfers to QROPS for expats or international workers with UK pension rights.
As pension savers will have more control over their money and how and when to take it from their pension once they reach 55 years old, many holding small pot pensions of £30,000 or less are probably unlikely to want to transfer to a QROPS due to the set up and transfer costs.
QROPS tax advantages
They should still consider the tax advantage of switching to a QROPS.
The key for QROPS is that the pensions are governed by regulators in the financial centres where the providers are based rather than UK rules.
That’s why some providers in jurisdictions like the Isle of Man, Gibraltar and Malta offer tax-free lump sum withdrawals of 30% of the fund value, compared with a maximum 25% for onshore schemes.
So, expats still have a tax advantage if they want to switch their pension offshore as they can draw down a larger lump sum before paying tax – and in Gibraltar, for example, income tax on pension payments after taking the lump sum is just 2.5%.
Analysing QROPS benefits
Take an expat with a £25,000 direct contribution fund still held in a UK pension scheme.
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Drawing down in the UK gives a £6,250 tax-free lump sum and a fund balance of £18,750 that can be draw down subject to tax. For a basic rate (20%) taxpayer, that would mean paying £3,750 income tax, giving a net pension of £21,250 after tax.
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Take the same pension fund into a Gibraltar QROPS and the pension saver can draw down 30% tax-free (£7,500) and drawdown the rest at an income tax rate of 2.5% – which is £437.50 income tax, giving a net pension of £24,562.50 after tax.
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The difference between the onshore and Gibraltar QROPS pay-out is £3,312.
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The decision whether to stick onshore or switch to a QROPS would depend on how much of that £3,312 is left after stripping out transfer and set-up costs.
Another consideration would be exchange rate fluctuations, as the pension saver would have to convert the UK fund from Sterling to a local currency, while most QROPS would pay in major local currencies like Euros or US dollars without any exchange rate charges.
Why would you want to transfer to a Gibraltar scheme and pay 2.5% income tax when you could transfer to a New Zealand scheme and pay no tax?