7 Benefits of a QROPS Pension Transfer17th January 2016
Qualifying Recognised Overseas Pension Schemes (QROPS) were first introduced in 2006 and have grown in popularity ever since. Generally, a QROPS is an overseas pension scheme which meets certain HMRC requirements. As a result, it is possible to transfer funds from a UK pension scheme to a QROPS without incurring an unauthorised payment charge or other sanctions.
QROPS are primarily designed for expats or those planning to retire overseas, but they can provide significant benefits even if you stay in the UK.
1. Greater Flexibility and Expanded Investment Options
UK based pension schemes are subject to strict regulations and restrictions, among other things severely limiting your investment options. Under a QROPS you may be able to access a wider range of assets and have greater control over investment strategy and risk management.
2. Protection Against Exchange Rate Fluctuations
If you retire outside the UK, your living costs will be denominated in a currency other than the British pound. With a UK based pension scheme, your income would be in pounds and not matching your needs. The purchasing power of your GBP pension income would fluctuate with the exchange rates – and the recent years have shown how volatile even major currencies like the euro or Swiss franc can be. Under a QROPS you can choose a currency which better fits your income needs. Sometimes you can even use multiple currencies for diversification.
3. Income Taxed in Your Country of Residence
There are many countries where income tax is much lower than in the UK. Depending on your circumstances (such as your particular QROPS setup, country of residence and domicile), your after-tax pension income can be much higher than it would be in Britain, allowing you to enjoy a higher standard of living in retirement.
Moreover, you can base your pension scheme in a country other than your country of residence, providing even greater flexibility and more tax optimisation opportunities, especially if you are internationally mobile and spend time in multiple countries.
4. Tax-Free Lump Sum up to 30%
You can take up to 25% as a tax-free lump sum from a British pension scheme. QROPS pension transfer regulations require you to use at least 70% of the total value for retirement income, potentially increasing the available lump sum to 30%. Note that taxation will depend on the local laws, particularly in your country of residence.
5. Avoiding the Lifetime Allowance
Lifetime Allowance (LTA) is of great concern, as it has been reduced from £1.8m (2011-12) to only £1m (effective from April 2016). In the UK, pension savings beyond the LTA are subject to tax of 25% (if taken as income) or 55% (if taken as lump sum) – and income tax still applies too, which makes pensions beyond the LTA extremely tax inefficient.
You can escape this by transferring to a QROPS. The value of your pension is tested against the LTA at the moment of transfer, leaving any future growth outside the scope of the LTA.
6. Avoiding Further Changes to British Legislation
The LTA is a good example of very significant and unfavourable changes which can happen in the British tax and pension legislation over the course of just a few years. The annual pension contribution allowance, which has fallen from £255,000 (2010-11) to only £40,000 (2014-15), with further cuts for high earners, is another one.
Planning and saving for retirement is very difficult when the rules constantly change like this. You can avoid the unpredictable British system by transferring to a more favourable and more stable jurisdiction.
7. Breaking Away from UK Inheritance Tax
Transferring your pension out of the UK is also important as an evidence of breaking your ties with the country, which can play a role when deciding your domicile for inheritance tax purposes. This alone can save your family large amounts of money if your estate is of significant size.
Other Advantages (and Disadvantages)
There are other advantages of QROPS, with some of them potentially more important to your particular situation than those listed above. For example, you could benefit from consolidation of your savings, better control and management if you are living outside the UK, or your spouse could have better access to death benefits in case of your death.
Nevertheless, QROPS have disadvantages, costs and risks too. One thing to keep in mind is that you may escape the British taxes and rules, but those in other countries may come into play. Transferring your pension is a big decision, which must not be made without careful analysis of all consequences. In fact, in some cases (when transferring more than £30,000 from a final salary scheme) you are required by law to first consult an FCA regulated adviser.