Saving tax is not a reason for switching retirement savings into a Qualifying Recognised Overseas Pension Scheme (QROPS) but how the transfer impacts on spending power is often a question asked by expats.
The answer is often disappointing – income tax on pension payments depend on where an expat is tax resident.
Pension tax rules
The rules for applying income tax vary for UK pensions and QROPS.
- UK retirement savers generally receive their pension payments net of basic rate income tax, although this is complicated by flexible access.
Under the pension freedoms that started in April 2015, large drawdowns are taxed at 40% or 45% and if too much tax is paid, the overpayment is reclaimed with interest from HM Revenue and Customs (HMRC).
Expats can choose to have their pension cash paid gross.
- QROPS savers can expect to have their pension payments paid gross. Any income tax is then dealt with in the country where they live.
Not all QROPS pay gross and some financial centres deduct a low tax payment.
The cap on pension early exit charges proposed by the UK government looks like applying only to British based pensions and not QROPS.
What sort of expat are you?
The term ‘expat’ is not helpful when considering UK and offshore pensions. The word suggests that anyone living overseas is an expat. This is incorrect.
How income tax on pension payments is applied is based on tax residence.
Someone living temporarily overseas who will return to a home in the UK is likely to keep their UK tax residence and will not qualify for the tax benefits of a QROPS.
This means two expats in Dubai could face completely different income tax treatment on their pensions.
One who has a home in the UK is still subject to British tax rules, while the other living permanently in Dubai is subject to the county’s zero income tax law.
The first step in determining whether a QROPS is right for an expat is establishing their tax residence.
HMRC has some guidance about this online, but the tools and advice concerning the statutory residence test are basic.
Once tax residence is decided, the way is open to investigate which QROPS is the best destination for an expat’s retirement savings.
