QROPS: Transferring UK Pensions Overseas

If you are now living overseas but have ever worked in the UK, it is likely that you have built up pension funds there. If you are planning to retire outside the UK there may be a case to consider transferring your pensions out of the UK. Following changes in UK law in 2006, it is now easier to transfer pensions abroad and there are more reasons for doing so in many instances.

If you are now living overseas but have ever worked in the UK, it is likely that you have built up pension funds there. If you are planning to retire outside the UK there may be a case to consider transferring your pensions out of the UK. Following changes in UK law in 2006, it is now easier to transfer pensions abroad and there are more reasons for doing so in many instances.

Under UK law, you cannot gain access to your UK pension funds until you reach the normal retirement age, which is increasing from age 50 to age 55 in April 2010. However, it is possible to move the funds that are building up in the pension to a scheme that is resident outside the UK. Funds can be moved as long as the overseas scheme is registered as a “Qualifying Recognised Overseas Pension Scheme”, or “QROPS”. To become a QROPS, the overseas scheme must fulfil certain criteria as to when and how the pension can be taken (not earlier than age 55, and no more than 30% as a lump sum in retirement), and register with the tax authorities in the UK.

So why would moving your pension make sense?

One big advantage is that, should you retire outside the UK, your pension payments from a UK scheme are treated as UK taxable income. Not a problem if you retire to a country with an agreement with the UK that allows the UK pension to be paid without deduction of tax, but not all countries have such an agreement. – a good example being Hong Kong. So, if you retire in Hong Kong, you can avoid UK tax on your UK pension by transferring it to a QROPS. With the UK moving to a top rate of 50% for high-income earners, this is certainly worth considering.

Other advantages include the ability to have pension income denominated in a currency other than sterling, and the ability to appoint your usual investment manager to manage your pension fund.

However, there is one other major advantage to transferring to a QROPS if you have large funds in a UK pension fund. To explain this, it is first necessary to examine what happens if you leave your money in a UK scheme. Upon reaching age 55, you have several retirement options:

(i) Leave the fund invested and defer taking your pension
(ii) Take a maximum lump sum equal to 25% of the fund value and defer taking the pension
(iii) Take a maximum lump sum equal to 25% of the fund value and draw an income from the remaining fund
(iv) Draw an income from the whole fund

If you decide to take an income, you can either buy an annuity or draw income directly from the fund. Many people do not buy an annuity at this age due to the unattractive rates available, and because there would be no fund available to heirs on death.

If you take your lump sum and do not buy an annuity, then your scheme is in what is termed “drawdown”.

If you die between the ages of 55 and 75, and your pension is in drawdown, then the remaining fund can be left as a lump sum to your heirs. However, the fund will suffer a tax penalty equal to 35% of the fund value.

If you are still alive at age 75, then you must now choose to either purchase an annuity, or the fund remains in a type of drawdown called “Alternatively Secured Pension”, or ASP.

Choosing an annuity will again mean no fund on death will be available to heirs. If you choose ASP, you can leave the remaining fund to heirs, but the sting in the tail is that the fund faces perhaps one of the world’s highest tax liabilities. With a combination of tax penalties and inheritance tax, the bill can be as high as 82% of the fund value!

If you transfer your UK fund to a QROPS, however, it is possible to avoid this potential liability altogether. That is because, once you have been non-UK resident for at 5 years, the tax penalties outlined above no longer apply to a QROPS.

That’s the advantages of QROPS, but there are pitfalls to be wary of before considering a transfer.

Firstly, there are schemes around that claim to allow you to take your entire pension fund in one lump sum. A very attractive proposal, but be aware that these schemes are considered very abusive by the UK tax authorities, and they have taken action against several of them, leaving people who transferred facing a bill of up to 55% of their pension fund should they ever return to the UK.

You also need to consider whether the costs involved will be worth the tax savings, particularly in relation to smaller funds, and funds that have guaranteed income promises attached to them.

Finally, QROPS schemes are based in various jurisdictions, each offering certain advantages and disadvantages, depending on your own particular circumstances. This article is necessarily of a general nature only and is not intended as specific or individual advice.

October 2009.

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