Offshore Private Pension Transfers - Growing Clarity for QROPS
If you have ever worked in the UK, no matter what your nationality, the chances are you will have been enrolled in a private pension scheme to which your employer and maybe you made contributions in the past. The UK government continues to tweak legislative changes affecting the expat’s ability to move this pension offshore. On the surface, these changes appear to limit transfer options, but in reality they have strengthened the legal framework offering expats continuing advantages.
When you leave the UK your private pension fund remains valid and is frozen, or deferred, until you reach retirement age, when it will be paid to you as a pension. The income paid is taxable in the UK no matter where you are based in the world. Once you die the pension will possibly continue in the form of a spouse’s pension if you are married; otherwise it will cease. When your spouse dies all benefit payments come to an end.
If you take any part of your fund or die before you fully retire, then a lump sum can be paid to your spouse. Although this is exempt from inheritance tax there is a special lump sum benefits charge, also known as “death tax” payable on the remaining fund. This is at the rate of 55% of the benefit amount.
In April 2006 Her Majesty’s Revenue and Customs (HMRC) in the UK introduced pension ‘A’ day. This liberalised UK private pensions and allowed them to be transferred offshore from the UK under certain circumstances. In doing this the UK complied with European legislation which allows all citizens the freedom of movement of their capital. QROPS were thus born and people leaving the UK were allowed to transfer their private pensions overseas, often to a new employer. In fact the initial schemes which became QROPS were based in Australia and South Africa. These schemes were mostly specific employer schemes.
The financial services industry soon realised that there was a gap in the expat market as there were no specific schemes to transfer UK pensions to. Thus there were a number of independent schemes created which allowed any eligible individual to transfer to. This included such expats as those in Thailand. As an individual you are allowed to become a member of a larger group scheme.
QROPS are not necessarily the right thing in every single case. In order to decide whether it would be advantageous to transfer your pension, a professional adviser should carry out a personalised evaluation and show you what the projections would be for both transferring and leaving your pension in the UK, with the intention of drawing the benefits in retirement. However, there are compelling arguments, out with the evaluation alone, which are often overlooked and may affect you in the future.
One of these is that a large number of UK schemes are currently in deficit to the point that they will be unable to pay future projected benefits for the periods their members are expected to live. This would mean that even though it looks as though there are arguments to leave your UK pension in situ it may actually be wise to transfer it. Would you like to be part of a scheme which is insolvent and unable to pay your pension when you retire?
There are also benefits to your successors in transferring your UK pension to a QROPS. These are mainly that you may choose who your beneficiaries are. Not limited to your spouse or even just your children your residual investment could be gifted to other beneficiaries you specify in the form of a lump sum or ongoing payment of income benefits.
In order for you to make the best decision you need to seek professional advice on what would be the best situation for you. This will entail seeking details of the current UK schemes, including transfer values, the types of benefit payable and options going forward when you get to a retirement date and when you die. Your adviser will be able to do all of this and generate a report detailing their findings.
You will then be in a position to evaluate, with your adviser, what the best options will be for you.
The following advantages certainly make a strong case for serious consideration of a transfer:
- 30% initial lump sum available after 5 years offshore
- Pension payments made to you free of UK income tax
- Flexible pension payment calculations within QROPS rules
- Unlimited global investment choices
- Diversity of investment currencies enables better FX control
- Schemes available all over the world
- Residual lump sum available to whomever you choose as heirs
- Residual lump sum free of UK inheritance tax (IHT) and death tax
Once a decision has been made on whether you will benefit from a transfer there will next need to be an evaluation on the best jurisdiction for your QROPS. This will largely depend on where you intend to retire and the tax rules between that country and the country where your QROPS will be domiciled.
Since the introduction of QROPS there have been a number of developments in their ongoing administration because there are always a few who spoil things for the many. Certain schemes offered potential members a full refund of their entire scheme value if they transferred to their specific QROPS. This is against the spirit of QROPS under HMRC rules, where transferred benefits must be treated largely the same as UK schemes. In other words the intent is that the benefits are to generate income to sustain the member during their retirement.
These schemes who offered full refunds created a situation known as ‘pension busting’ and HMRC took a dim view of these. In 2012 HMRC introduced amendments to the rules to stamp these non-complying schemes out.
Simultaneously rules were also introduced to ensure that taxation was not abused and that schemes where QROPS were held treated residents the same as non-residents for pension income tax purposes. This unfortunately erased Guernsey from the map of international QROPS schemes and as one of the most popular and best jurisdictions available up to that point. Schemes already held in Guernsey are safe and will continue to follow the rules as they were for all members. However, there are now no new schemes available.
This left the QROPS world in a dilemma as there was no specific jurisdiction which shone as the star where almost all schemes could be transferred and members would enjoy the same benefits as they had prior to these new rules being introduced.
When we look back at the rules and the changes which have been introduced to eliminate the abuse of QROPS schemes it looks as though there are less options and far more restrictions applied to what is available today. This is not the case. If you look carefully at the options available today they are more specific and offer just as many advantages.
One of the difficulties in the past year has been the development of the right options and compliance with HMRC rules so that the future will be stable for members who decide to make use of transferring their UK private pension to a QROPS.
Some schemes have been promoted as the best and offered to expats by advisers without full knowledge of the consequences of the future. Assumptions have been made which are not necessarily materialising. If you have transferred your UK scheme to a QROPS in the past year it will be wise to seek a second opinion about the possible pitfalls you may encounter.
Next time we will look in detail at specific jurisdictions; taxation; and pension vehicles which are open for members.
Questions to the author can be directed to PFS International on +66 (0) 2653 1971 or email to email@example.com.
Andrew Wood has been an expat in Asia for 32 years and is a Senior Consultant with PFS International. He has been writing Net Worth articles for four years and has made a significant contribution to the PFS library of financial service articles dating back over seven years. These articles which cover the complete A-Z of financial planning are available to readers on request.