UK pension schemes have always been restrictive. Now, the ability to transfer your UK pension to an international pension arrangement known as a QROPS (Qualifying Recognised Overseas Pension Schem
UK pension schemes have always been restrictive. Now, the ability to transfer your UK pension to an international pension arrangement known as a QROPS (Qualifying Recognised Overseas Pension Scheme) gives you more choice as well as giving you potential tax benefits.
British expatriates, or those who plan to move overseas, can transfer their UK pension fund into a QROPS and potentially avoid the tax rules of a UK based pension scheme. Furthermore, you will never be forced into buying an annuity from a Life Assurance company.
Two further and major advantages of a QROPS are the ability to have your pension funds held and the income that it generates paid to you in Euros or Sterling. Pension income will be paid to you gross even when you live in a country without a Double Tax Treaty with the UK.
Traditionally, most people had few options at retirement other than to buy an annuity. Although annuities provide a guaranteed income for the remainder of your life, the rates are determined by forward looking interest rates. Interest rates are low ? annuity rates are low ? and when you have purchased the annuity you are locked in at the rate you purchased at, even if they were to improve.
For all of us the future is uncertain and the purchase of an annuity is the one investment decision that you cannot change if your circumstances change. For example, do you take a lower income to provide for a spouse?s pension and then your spouse pre-deceases you (you have in effect bought something that you will never need)? Do you take a lower income at outset and have an increasing income to protect you from inflation but die in the early years?
When you die an annuity dies with you, except where you have purchased a spouse?s pension – in which case the annuity would cease on the second death ? or where you have purchased your annuity to include a guaranteed period of say five or ten years, the income would be guaranteed to be paid for the remainder of the period even if you had died.
In general, annuities are inflexible and are perceived as poor value and the number of people who do not want to buy an annuity has increased.
Alternatives to annuities
In recent years legislation has been introduced so that you are not forced into buying an annuity at any stage and you can take income from your pension whilst leaving your fund invested. The income levels that can be taken are governed by the Government Actuary?s Department; however they do allow for flexible levels of income to be taken each year. Known as Pension Fund Withdrawal plans (formerly Income Drawdown), if you die before age 75 and have not purchased an annuity your remaining fund will attract a tax charge of 35% unless your spouse purchases an annuity, or continues to draw down an income as you were.
However at 75, even if you were not drawing an income from your UK pension you would either have to purchase an annuity or have your funds transferred into what is known as an ?Alternatively Secured Pension? from which you have to take an income. Those rates are more restrictive than those you could take before you were 75, and on your death, the tax charge can be as high as 82%.
Currency advantages of QROPS
With your pension fund in a QROPS your assets can be established in Euros or any other currency, and the income can also be taken in any currency of your choice. If you are living overseas this will remove currency risk and currency exchange costs, forever, whereas a UK pension cannot. If however you prefer to leave your income in Sterling, then you can do so.
Tax advantages of QROPS
From outset, once in a QROPS, your pension will be paid to you gross of tax, although you will still need to declare it in the country in which you are resident.
Once you have been a non-UK resident for five complete and consecutive UK fiscal years, your QROPS will no longer be subject to UK rules, so that in the event of your death your fund will not be liable to any tax at all. If you have already been a non-UK resident for five years you can take out a QROPS and the benefits start straight away. If you have been a non-resident for three years you can still take out a QROPS but only have to wait two more years for the full tax benefits to start. On your death your heirs will be able to inherit the balance of your pension fund on your death.
The lengthy process of probate can be avoided too.
Your pension can roll-up tax free in a QROPS and will only become liable to tax when you take benefits. The tax position of benefits received will depend on your country of residence. Your pension income is not automatically reported to the tax authorities in your country of residence, but depending on your tax residence you may be obliged to declare it. By choosing the right professional financial adviser you can arrange your pension fund benefits in a legal but tax efficient manner.
A QROPS allows you to vary your pension income within limits. You also can select from a vast range of adaptable investment opportunities to suit your circumstances according to whether or not you want to focus on income or capital growth.
If you have more than one pension fund you can choose whether or not to transfer all of them into a QROPS. Many types of pension schemes including protected rights can be transferred into a QROPS. Unfortunately, you cannot transfer a UK state pension, a Final Salary Scheme if you have already started to take benefits, of if you have already purchased an annuity.
Blevins Franks Financial Management Limited is authorised and regulated by the UK Financial Services Authority (FSA). It can be checked out by logging onto the register at www.fsa.gov.uk.
By Jane Goodall, Director – International Pensions, Blevins Franks
19 August 2009