17 Nov Ex-pat financial planning – QROPS
What is the situation if you are a British expatriate living in South Africa? Do you have a pension fund in the United Kingdom? What are your options if you do have a pension payable from the UK? On moving to a foreign country, many British expatriates will have left their UK pension rights retained in their existing arrangements. These private pensions remain subject to UK pension law, with the effective requirement to purchase an annuity at a later stage. At the very least, this annuity purchase needs to occur no later than the age of 75, failing which significant tax charges may apply. Additionally, UK taxation may be levied on pension payments.
But legislation has changed in recent years. Under UK legislation effective April 2006, expatriates or UK residents who have a demonstrable intention to move overseas may transfer the value of their UK pension rights to a non-UK pension scheme.
What would be the benefit of this in your expat financial planning?
The major benefit is you would then avoid all the normal restrictions imposed on the pension fund if it remained in the UK, specifically the requirement that you purchase an annuity some time in the future, and the penalties levied if you do not purchase an annuity in time. The transfer must, however, be made to a Qualifying Recognised Overseas Pension Scheme (also known as QROPS) that is approved by HM Revenue & Customs.
Should you then automatically transfer your pension fund to a QROPS scheme?
There are a number of basic conditions that must be fulfilled in order for a transfer to a QROPS pension scheme to be considered advisable, and cases should be examined on an individual basis. Your financial planner will be able to help you determine whether a QROPS makes sense in terms of your overall expat financial planning circumstances.
The basic rules are:
- A QROPS is a pension scheme set up outside the UK that’s regulated as a pension scheme in the country in which it is established and which must be recognised for tax purposes in the country in which it is established.
- The maximum benefit is achieved when the pension holder is non-resident in the UK and has been so for five complete UK tax years.
- The transfer must be made to a QROPS approved by the UK Revenue authority.
Why is it that the maximum benefit is achieved after five years of non-residence?
This is because, after your scheme has been transferred to a QROPS, and after five years of non-residence, your QROPS provider is no longer under any obligation to report withdrawals or payments to the UK authorities.
Your existing UK pension scheme can be in drawdown before transferring to a QROPS. However, there are restrictions and if the permitted lump sum has been taken, no further lump sums are allowed.
UK rules impose a statutory lifetime allowance relating to the amount payable from UK registered pension schemes that will be treated as tax-privileged. For the tax year 2008/9 this allowance is £1.65m and will rise in stages to £1.8m by 2010/11. Transferring benefits to a QROPS in excess of the lifetime allowance will be taxed at the rate of 25%.
What’s the biggest benefit of a QROPS in expat financial planning?
Tax considerations aside, the biggest benefit of a QROPS in expat financial planning may be the ability to control whether you wish to purchase an annuity by the age of 75. Whereas a traditional British pension requires you to purchase an annuity, a QROPS does not. The purchase of an annuity can be restrictive not only on how you invest, but also on how you transfer wealth to your estate and beneficiaries. With traditional UK pensions, there is the possibility that your annuity will die with you. However, with a QROPS, there is no requirement to purchase an annuity, and you are therefore able to put your pension fund to work in a properly diversified strategy across different asset classes and different regional allocations. You also have the ability to pass these funds on to your beneficiaries on your death.
For those who do receive a UK pension, who are non-resident in the UK and have been for more than five years, a QROPS might well be an efficient way to manage your pension. However, it is advised to get a professional well-versed in expat financial planning to assist you with determining whether such a pension fund transfer is best suited to your individual needs.
My advice is to engage an independent, fee-based certified financial advisor who is focused on your best interests and can provide impartial advice. If you do not have a Certified Financial Planner® professional, visit the Financial Planning Institute website to select one.
Ian Beere CA(SA) CFP® was Financial Planner of the Year in 2007.