- Tax efficient planning
An increasing number of professionals from all nationalities have been moving and
working abroad in the last decade. Offshore financial products and services can help
you achieve financial security and provide you with the quality of life you require as
My aim is to provide you with information for effective retirement planning as an expatriate, and detail how a Qualifying Recognised Overseas Pension Scheme (QROPS) may be beneficial to your retirement needs.
Since 2006, QROPS has allowed individuals to transfer their UK pension into an overseas pension scheme which is authorised and regulated within another jurisdiction, whilst following similar legislation to a UK pension scheme.
To qualify for a QROPS certain criteria must be met, such as only being able to access benefits after age 55 (unless in ill health) and the scheme must be open for local citizens as well as expatriates.
HMRC have put this criteria in place as the QROPS regime is not to be used for tax avoidance.
Qualifying schemes tend to originate in jurisdictions such as Malta, the Isle of Man, Australia and New Zealand, and the list of qualifying schemes is available from HMRC’s website.
Transferring to a scheme which is not recognised by HMRC is known as an unauthorised payment and will be subject to an unauthorised payments tax charge of 40% of the amount
transferred, with the potential for a 15% unauthorised payments surcharge if more than 25% of the fund is paid out by the trustee.
The QROPS manager and trustee will detail the structure of the scheme, however most QROPS follow a similar structure of setting up a master trust with a corporate trustee (e.g. the
QROPS provider). The trustee holds the investments on the member’s behalf and will follow their investment instructions or take instructions from an appointed financial adviser or investment manager (albeit within an acceptable risk tolerance).
Legislation states that any income or lump sum payment from a QROPS within ten years from the transfer must be reported to HMRC by the QROPS manager. After the initial ten years, if the
member has been a UK resident within one of the last five tax years then the reporting will continue until the member has been non-resident for a five-year period. Depending on the rules within the QROPS jurisdiction, members who have not been a UK-resident within the last five years may be able to withdraw up to 30% of the pension value as a
tax-free lump sum (compared to 25% pension commencement lump sum for a UK scheme).
A QROPS may be suitable for those with existing pension rights who are planning to retire outside the UK. In addition, there are planning opportunities with a QROPS for individuals who have pension benefits which may exceed the UK Lifetime Allowance, regardless of their residency status.
The main advantages of having a QROPS include:
As with UK pensions, QROPS are exempt from UK Inheritance Tax, but it is important to remember that the local tax office in the member’s country of residence or citizenship may impose their own taxes. Upon death, UK resident beneficiaries will be taxed as if they were receiving benefits from a UK registered pension scheme which is free from income tax when the
member’s death occurs before age 75, and at the beneficiary’s marginal rate of income tax when the member’s death occurs post age 75.
Some QROPS jurisdictions have tax deducted at source on income paid from the scheme to
satisfy local tax regimes. If this is the case, a double taxation treaty between the QROPS
jurisdiction and the country in which income tax is due, may be present. A double taxation
treaty divides the taxing rights of an individual’s income between the two countries
involved. The UK has double taxation treaties for income tax with over 130 countries.
The overseas transfer charge came into effect for transfers made on or after 9th March 2017, and the main impact for expatriates was that unless the transfer met one of HMRC’s conditions, a 25% deduction in tax would be applied to the original transfer value at the point of transfer.
If one of the following conditions applies, then the overseas transfer charge does not
apply at the time of transfer:
The individual lives in the same territory in which the QROPS is located (e.g. an Australian QROPS for a resident of Australia).
The individual lives in an European Economic Area (EEA) country, and the QROPS is also located in an EEA country (e.g. a Malta QROPS for a resident of Spain).
The QROPS is an occupational pension scheme where the member is an employee of the sponsoring employer
The QROPS is linked to the member’s employment such as a public service pension scheme or set up by an international organisation such as the United Nations.
If a change of circumstances occurs within five years following a transfer to a QROPS and the conditions to be exempt are no longer met, the overseas transfer charge would become payable. This five-year period begins on the date of the original transfer and ends on the last day of the 5th complete tax year.
A transfer from one UK scheme to another does not trigger a benefit crystallisation event (BCE). A BCE is a test against the member’s remaining Lifetime Allowance (LTA) and any funds in excess of the remaining LTA are taxed.
The tax charge is 55% if the excess is taken as a lump sum, or 25% if taken as income or when transferring to a QROPS.
Within a UK defined contribution scheme, such as a Self-Invested Personal Pension (SIPP). Any crystallised funds (remaining funds after the PCLS has been taken) are re-tested against the LTA at age 75 and the growth since the initial BCE is tested against the remaining LTA.
A transfer from a UK pension scheme to a QROPS is a BCE, which means the benefits are tested against the LTA at the time of transfer. However, within a QROPS, there is no further test at age 75, therefore by transferring to a QROPS, it is possible to remove the possibility of paying further LTA taxes at age 75 after the initial BCE.
Whilst most international SIPPs and QROPS offer the same flexibilities in terms of income, currencies and investment choice, there are two main differences. These differences are the Lifetime Allowance (LTA) test, and for those due to pay UK income tax on their pension income, the way in which UK income tax is paid to HMRC.
As mentioned above, within a QROPS there is no further LTA test at age 75, and, therefore, for larger pensions it may be beneficial to transfer to a QROPS to mitigate the
impact of a further tax charge on the fund growth.
With a UK pension scheme such as a SIPP, for UK taxpayers, the pension scheme automatically deducts UK income tax on behalf of the member through PAYE.
For non-UK taxpayers, if there is a double taxation agreement between the UK and the country of residence it may be possible for the income to be paid without the deduction of any UK taxes, and if living in a country which doesn’t tax pension income, obtaining a “NT” (no tax) tax code notification from HMRC would allow pension income to be paid gross. Any taxes which have been overpaid in the UK can be reclaimed from HMRC.
For a QROPS or overseas pension, the income can be paid gross, or for some jurisdictions a withholding tax may be deducted. For UK resident members of QROPS and overseas pensions, the income paid would need to be declared on a self-assessment tax return, and for non-UK residents, local taxes may be due in the country of residence.
Effective planning for your retirement can make the difference between just being able to live and living comfortably. If you have a substantial pension and are planning to retire abroad it makes sense to get sound financial advice from pension experts on whether a QROPS may be suitable for you.