When you move from one country to another, you should review your wealth management arrangements to ensure they will work effectively for your new lifestyle and that they are suitable for the inve
When you move from one country to another, you should review your wealth management arrangements to ensure they will work effectively for your new lifestyle and that they are suitable for the investment and tax regime of your new country of residence. You will also want to establish if your expatriate status and/or the local rules provide any new opportunities for increased tax mitigation.
While many people do review their saving and investment arrangements, they often fail to consider their pension funds ? perhaps because they know that the UK retains a tight control over them, even if they have left the UK.
However, while UK pension funds may be fairly inflexible and could be liable for UK death taxes even where the owner is non-UK resident, many expatriates do have the QROPS option. If you have left or are about to leave the UK it is now possible to transfer most private pension funds into a Qualifying Recognised Overseas Pension Scheme (QROPS).
Deferred pensions, pensions in drawdown and protected rights can all be moved into a QROPS, but you cannot make a transfer if you have already bought an annuity. Final Salary Schemes are only eligible if the pension has not commenced and state pensions cannot be moved either.
Improving pension income and investment opportunities
QROPS can be more flexible in how and when you take your income. You can vary your income (within limits) to suit your lifestyle and financial requirements within your country of residence. A wide range of investment opportunities are available within a QROPS, and with increased control over your fund you can structure it to suit your needs for income and capital growth.
Another way to increase your income is of course to pay less tax on it. Your pension can roll up tax free within a QROPS and income will be paid to you gross. You do need to declare it in your country of residence, but in countries like Spain, Portugal and France you can structure your fund so that you pay less tax on it than you would with a UK pension fund.
Removing currency risk
Exchange rate movements between Sterling and the Euro can affect how much pension income you receive each month. While sometimes your income does increase, as we?ve seen over the last few years more often than not you end up with less in your pocket. You may also be paying exchange rate costs.
With a QROPS you can choose which currency your fund is denominated in and which currency you receive the income in. This can be Sterling, or Euro, or indeed any currency. By holding your fund in Euros you will no longer be at the mercy of falling rates. If you want to give the exchange rate the opportunity to improve before you change currency, you can set up your fund in Sterling and transfer to Euros at a later date.
Avoiding the annuity trap
Under current UK legislation, you must either buy an annuity by your 75th birthday or be transferred into an Alternatively Secured Pension (ASP) ? but for many people neither is a particularly attractive option.
Annuities are increasingly considered inflexible and annuity rates are currently very low. When you die the balance of your fund dies with you ? you cannot pass this asset onto the next generation. Other than perhaps a spouse?s/dependent?s pension, there is nothing to leave your family, even if there is still a healthy balance left in the fund.
With the ASP alternative you would receive lower levels of income than you did when you were in drawdown. While you can leave the balance to your family, it comes at very high price ? the tax charges on death can be as high as 82%!
The Conservatives have said that if they win the General Election they will scrap the compulsory annuitisation at age 75. In certain respects this is strange news because, as I have said above, there is currently no legal compulsion to buy an annuity at age 75. However time will tell what George Osborne means by this.
On the other hand, if you transfer your pension into a QROPS it won?t matter whether this goes ahead or not, because with a QROPS you never have to buy an annuity, which means you may be able to leave your family a larger inheritance. If you think an annuity would suit your circumstances, however, the option to purchase one remains open to you.
Avoiding UK death taxes
If you have taken any benefits from your UK pension fund (income or cash lump sum) and have not bought an annuity, it will be potentially liable for a tax charge on death of 35% pre age 75 and up to 82% post age 75. This also applies to non-UK residents and even to non-UK domiciles. Unlike with inheritance tax, there is no exemption between spouses.
However, if you have transferred your pension into a QROPS, and provided you have been non-UK tax resident for five complete and consecutive tax years at the time of your death, your fund will escape the UK charges, that is, both the 35% charge on income drawdown and the up to 82% charge on ASPs.
While transferring your pension funds into a QROPS can provide many benefits, it won?t necessarily suit everyone, so do make sure you understand all the implications before you decide to go ahead. For those whose pension funds total less than ?75,000, a move to QROPS is unlikely to be cost effective. You should also make sure that the scheme you choose is approved by HM Revenue & Customs and follows the spirit of the UK legislation which allows pension holders to transfer out of the UK and into a QROPS.
Always seek advice from a qualified adviser like Blevins Franks Financial Management Limited which is authorised to give advice on UK pension transfers.
By David Franks, Chief Executive, Blevins Franks
12th February 2010