In April 2006 the UK government introduced far reaching changes to the pensions system in the UK. The most significant change to the system was the HMRC’s backing of the transfer of UK pension assets into overseas pension schemes, or QROPS. Today, if you have UK based pensions totalling in excess of £50,000 and you’re an expatriate, soon planning to become an expat, or to retire overseas, then you would be wise to seek advice on whether a QROPS scheme is suitable for you.
A Qualifying Recognised Overseas Pension Scheme (QROPS) is any scheme recognised by HMRC as meeting standards and conditions equivalent to a UK pension. Once recognised as a QROPS, the pension scheme can then be used to receive pension assets from UK plans from people who are living outside of the UK, or from those who intend to shortly permanently leave the UK. To qualify as a QROPS, various requirements must be met. The HMRC will look at how the country of establishment of the QROPS will regulate the pension, how much protection there is for the pension plan member, and how much freedom the holder has to utilise the pension assets prior to retirement age.
To take a look at the curret system, the UK pension rules are antiquated, and do not reflect the needs of the modern investment climate, or the needs of the modern day expat. After leaving the UK for work, or indeed to retire, the pension plan holder can no longer contribute into his UK pension- in other words, his contributions are frozen.
The requirement to buy an annuity is perhaps the most antiquated rules in UK pensions law, which states that at age 75, the holder must cash in his or her pension, and buy an annuity, which offers the holder a low monthly payment, which is then subject to income tax. On death, a spouses or widows pension can be up to half the original sum and on their death the benefit often cannot be passed on to children or other beneficiaries.
Overseas based UK pension holders can now address these problems by looking into the possibility of transferring their UK based pension plans into a QROPS. Rather than a domestic scheme in your country of residence, a QROPS plan can be based in a neutral fiscal jurisdiction such as Guernsey, Isle of Man or New Zealand, which have more favourable tax treatment of pensions, and more flexible rules.
Nevertheless, despite all the clear advantages of a QROPS, there are still a number of pitfalls which must be considered, and a qualified QROPS expert can advise you on these. A key reason why a QROPS is not a good option, is if the overseas based expat has health problems, and if it is a possibility that the expat may return to the UK for health treatment on the NHS. In this case, the HMRC will claw back the tax it has lost, and more, on the value of the pension.
The benefits of transferring your UK based pension assets into a QROPS are therefore clear.. The clear winner is not having to buy a low yielding, expensive annuity. This is perhaps worth transferring into a QROPS on its own, as annuity rates are at multi year lows, as a result of an ageing population, and a harsh economic environment.. Also, add in the possibility of a tax free lump sum, wider investment freedom and a flexble approach to IHT planning, and it is plain to see why so many people are now transferring their UK pensions into QROPS.. As a final word of caution, whilst the advantages of a QROPS almost sell themselves, expert advice and help must be sought, preferably from a QROPS expert with several years experience of advising expats in overseas pension transfers.
