Thousands of expat pensioners are mystified why they should pay tax on their UK pensions when they are living overseas.
To avoid paying tax on their pensions in the UK, expats need to live in a country which has a specific clause in a double taxation agreement that exempts pension payments.
If the clause is missing or incorrectly worded, the expat will have to pay income tax in Britain on payments shipped overseas as HM Revenue & Customs (HMRC) considers the money is ‘earned’ in the UK and taxable.
For pensioners drawing less than £10,000 a year pension income, including the state pension, and who hold a British passport, no tax should be due as they are entitled to an income tax personal allowance.
But the easiest way to get around the problem for anyone with one or more personal pensions is just to switch the UK pensions into a Qualifying Recognised Overseas Pension Schemes (QROPS).
What is a QROPS?
QROPS are special offshore pensions for British expats or international workers who have spent some time in the UK and accrued pension rights.
Transferring onshore UK pensions to a QROPS means pension benefits are generally paid gross of income tax – so they are taxed at the marginal rate in the country where the expat lives. Some financial centres deduct tax from QROPS benefits. In Gibraltar the rate is 2.5%, so significantly lower than the 20% paid in Britain.
Another benefit with Gibraltar QROPS – and those based in several other places, like Malta – is the retirement saver can live wherever they like and are not restricted to the place where their QROPS is based.
Other jurisdictions, like Jersey and Guernsey, require QROPS investors to be tax resident.
Treasons to switch to a QROPS
Tax is not the only reason for switching to a QROPS.
Many of these offshore pensions pay benefits in a choice of major currencies directly to an expat’s local bank, cutting out delays in transferring cash between banks and costly foreign exchange rate fluctuations that can wipe away spending power.
Other benefits can include up to a 30% tax free lump sum drawdown, compared to 25% of the fund in the UK and no 55% inheritance tax charge against any unspent funds left in the QROPS. In Britain, unused pension funds are taxed when the retirement saver dies.
The options for transferring to a QROPS pension are vast – more than 3,400 pensions are provided in 42 countries and financial jurisdictions worldwide.
