Why Expats Should Look At A QROPS Pension Transfer

After a great number of changes in UK pensions over the past few years, it’s important that you know how these affect you and your retirement savings.

The UK has two types of pensions – defined benefit – also known as final salary schemes – and defined contribution.

Defined benefit schemes give a final pension depending on the saver’s final salary and the length of time they worked for their employer. This is normally paid at 60 or 65 years old until the individual dies.

Surviving spouses are paid 50% of the pension, but when they die, the payments stop, leaving nothing to pass on to children or loved ones.

Defined benefit schemes have some drawbacks:

• The payment is inflexible. The benefit is fixed and if the pensioner needed extra funds, these are unavailable.
• The benefits are only payable as long as the company is still in business.
• Financial experts suggest more than a thousand workplace pensions will not pay out in full because their liabilities have swollen to more than £1 trillion

Well-known companies like Woolworth’s, Kodak and HMV are among almost 6,000 defined benefit schemes that will not pay out as expected now safeguarded by the Pension Protection Fund.

Death, taxes and your pension

Defined contribution schemes are pensions regularly receiving contributions from a worker, their employer or sometimes both. The contributions are invested in the stock market and the income paid during retirement depends on how well the investments performed.

This money is available from when the retirement saver reaches 55 years old and 25% of the fund is tax-free. The rest of the fund provides an income in retirement or can be withdrawn and spent as and when the saver likes.

However, many people have tried to cash in their pension in one go only to find they have had to pay 45% of the money as income tax because the sum is added to their other earnings for the year.

What happens to the pension when a retirement saver dies depends on age:

• If they are under 75 years old, the balance of the fund passes to beneficiaries free of tax.
• If they are over 75, which three-quarters of people are when they die, the balance is passed on after paying a 45% flat rate of income tax

If you leave the UK as an expat, other options are available.

You can move your pension scheme into a Qualified Recognised Overseas Pension Scheme (QROPS). A QROPS is essentially an international pension that has official status with HM revenue and Customs (HMRC).

Tax advantages of a QROPS

A QROPS can offer greater flexibility and tax advantages.

The benefits include:

• On transferring to a QROPS, the pension fund can be converted into the local currency and invested into assets you can choose
• From the age of 55, investors can take a 30% tax-free lump sum
• Depending on where you live when you retire, you can receive the income with minimal tax, but if the same money was paid by a UK pension, you would pay tax

Even though these are attractive benefits, one of the most appreciated is what happens to the money when the client passes away. When you die, all the money in a QROPS can pass to your spouse, children, grandchildren or whoever else you name as a beneficiary completely free of tax.

Think of a saver with a defined contribution pension. When they die, 50% of the pension disappears and the surviving spouse continues to receive 50% of the benefit until they die.

Compare this to a QROPS where all of the remaining funds can be passed on tax free.

The average life expectancy for a defined contribution pension saver is 79 for a man and 83 for a woman. Because they are likely to die aged over 75, their beneficiaries are likely to have a tax liability on any inherited pension.

Imagine a beneficiary earning £50,000 a year who inherits a £100,000 pension. More than £50,000 would be paid in tax as the pension is taxable income for that year.

Coming home with a QROPS

Besides questions about the benefits, expats want to know what happens to their retirement savings if they have a QROPS and move back to the UK.

The answer is straightforward. As an international pension, only 90% of any benefits paid by the QROPS are liable for UK income tax.

All other benefits are the same as a UK pension except tax on the remaining fund on death.

If you pass away aged over 75, your beneficiary will pay income tax, but only on the original amount transferred into the QROPS less any withdrawals you have made.

For example, if a £200,000 pension is transferred and grows to £300,000 and £200,000 is paid in benefits, no tax is paid on the remaining £100,000.

Will a QROPS improve your retirement finances?

How do you find out whether it’s worth moving one or more UK pensions to a QROPS?

The first step is signing a letter of authority that allows your IFA to speak to your UK pension providers to find out how much your pension is worth and the terms of the scheme, such as a guaranteed annuity rate.

This allows a direct comparison between the current scheme and a QROPS.

This comparison shows whether your best financial interests are best served by leaving the pension where it is or moving the money to a QROPS.

This service is free and tells you want your options are while putting your mind at rest about making the best financial decisions for yourself, your family and other loved ones.

For more information about QROPS and the benefits it provides, download the iExpats QROPS Guide or complete the Get Advice form.