Written exclusively for Expat Network by Julian Vydelingum, Chartered Financial Planner and Associate Director at chartered financial planners AES International.
The majority of British expats lose the right to benefit from an element of tax relief on their UK pension contributions after they’ve been tax resident overseas for more than five years.
There are occasional exceptions to the five-year limit, with some expats qualifying to pay contributions net of basic rate tax for some years beyond that.
However, for many long-term expats and those who also plan to retire abroad, the question of potentially transferring their pension – either to a more flexible personal UK arrangement or a suitable overseas pension comes up at some point.
Five important pension transfer facts to keep in mind
- Pension transfers can be advantageous for some people, and even bring tax benefits.
- The potential benefits are heavily marketed and even over-sold by some financial salespersons. This is because they can derive significant commission payments on certain pension transfers.
- Their commission payments always come from your pension.
- Be informed of your options; the potential risks and the potential benefits before making any decisions.
- If you get it wrong, you could face a loss of up to 55% of your pension in tax charges or an overseas transfer charge of 25% following legislation which came into force in 2017. You may also incur other penalties and financial losses.
Who can transfer their pension abroad?
Those with benefits in UK pension schemes have a right, in most circumstances, to transfer to another UK scheme willing to accept them. Expats also have similar options to transfer most UK pensions overseas into a qualifying recognised overseas pension scheme, or QROPS; however, if certain criteria are not met, a transfer to a QROPS could be liable to a 25% tax charge.
HMRC also refer to these schemes as ROPS or recognised overseas pension schemes.
To qualify as a QROPS, an overseas scheme has to meet certain specific requirements determined by UK tax law and to inform HM Revenue & Customs (HMRC) that it does qualify and continues to qualify. Provided that the scheme does in fact meet those QROPS requirements, then transfers to the QROPS do not incur UK taxation on the transfer itself. However, no QROPS is in any sense approved by HMRC no matter what a commission-driven salesperson may tell you to reassure you about a proposed scheme! HMRC does not itself carry out any checks that a scheme qualifies.
When could an overseas transfer charge apply?
Legislation which came into force on 9th March 2017 means that transfers to a QROPS from that date may be subject to a tax charge of 25% of the transfer value unless one of the following criteria apply:
- both the individual and the QROPS are in the same country after the transfer
- the QROPS is in a country in the EEA (an EU Member State, Norway, Iceland or Liechtenstein, in the context of this Gibraltar is considered part of the EU as part of the UK) and the individual is resident in another EEA after the transfer
- the QROPS is an occupational pension scheme sponsored by the individual’s employer
- the QROPS is an overseas public service pension scheme
- the QROPS is a pension scheme established by an international organisation and the individual is employed by that international organisation. The legislation around this component is complex – it does not simply mean a multi-national employer
If the transfer is not liable to the overseas transfer charge at the point of transfer, UK tax charges will apply if, within five tax years, an individual becomes resident in another country so that the exemptions would not have applied to the transfer
When is an overseas pension scheme treated as a QROPS?
A scheme must meet three layers of rules and regulations to qualify as a QROPS:
- Overseas Pension Scheme Regulations
- Recognised Overseas Pension Schemes regulations
- Additional reporting requirements.
HMRC has a list of ROPS and updates the list regularly.
However, not all schemes that have told HMRC that they qualify as a ROPS do in fact request a listing. What’s more, in line with its approach of not approving any scheme or confirming that a scheme qualifies as a ROPS, HMRC says this about its list:
“HMRC can’t guarantee these are ROPS [recognised overseas pension schemes] or that any transfers to them will be free of UK tax. It is your responsibility to find out if you have to pay tax on any transfer of pension savings.”
In other words, buyer beware, caveat emptor!
What are the potential benefits of transferring my pension abroad?
The potential benefits of a pension transfer include the following; however, you may not be eligible to benefit from some or all of these:
- Potentially up to a 30% lump sum, which may be tax free in the member’s jurisdiction of residence. A number of criteria need to be met to receive this, so typically lump sums are 25% of the value of the pension, similar to a UK personal pension or SIPP arrangement;
- Tax-free growth beyond the UK’s lifetime allowance limit;
- Pension income taxed in your jurisdiction of residence, which could be a low or no tax jurisdiction, or which has a double taxation agreement (DTA) with the jurisdiction where the QROPS is based;
- No income tax charge on death after age 75 if the beneficiary is non-UK resident;
- Protection against future exchange fluctuation risks provided that your QROPS funds are in your local currency;
- Benefit from broad investment choice (like a SIPPS in the UK);
- Portability and flexibility;
- Consolidation of multiple pensions (like a SIPPS in the UK);
- Potential of increasing a spouse’s pension (more than a UK defined benefit scheme offers);
- Potential of planning pension income drawdown to mitigate tax obligations (like a SIPP in the UK);
- Permanent removal from effects of UK pension legislation changes.
What are the potential risks and how can I avoid them?
There are many risks involved. Perhaps three main ones (and two extra for transfers from UK defined benefit schemes) that at the least you should be aware of are:
In international markets, your adviser/salesperson is typically financially incentivised to encourage your pension transfer, meaning they are acting in their own best interests instead of yours.
Consider taking advice or seeking a second opinion from a chartered financial planner, accredited by the Chartered Insurance Institute (CII) and UK Personal Finance Society. They are bound by the CII’s code of ethics, which means they have to: –
- Comply with all relevant laws and regulations.
- Act with the highest ethical standards and integrity.
- Act in the best interests of each client.
Provide a high standard of service.
- The CII maintains a list of chartered financial planning firms.
HM Revenue and Customs decides at some point in the future that the scheme your pension is transferred to does not satisfy the QROPS requirements, or that the pensions or tax regime in the jurisdiction the scheme is in changes so that it cannot support a QROPS.
This could result in yours being deemed an unauthorised transfer. The penalty is up to a 55% tax charge. Other fines and charges may apply.
Do your own due diligence on any scheme and jurisdiction suggested to you by your adviser. You need to ensure the scheme complies with the above detailed conditions set by UK tax law. If in doubt, seek advice.
Most UK schemes are run by professionals, who take careful investment advice. On a transfer to a QROPS, you take responsibility for your investments; many who transfer into QROPS take investment advice from those same salespeople who have a financial incentive to sell you the idea of a transfer in the first place – so you may well be recommended funds that bring the best return to them, not the best result for you.
Check that your adviser is qualified, authorised by a robust regulator and that redress procedures are available if anything goes wrong. Avoid funds promising results far beyond the ordinary, have exit penalties or which are non-mainstream.
Defined benefit transfer risk 1
Losing guaranteed, minimum or defined benefits (“safeguarded benefits”) from your UK scheme is often described as a risk. Calling this a risk, though, is wrong, since risk means the possibility of things going other than you would wish. However, if you transfer out of a UK safeguarded benefits scheme, the loss of those benefits is a 100% certainty, not a risk. The true risk is that your new pension arrangements will not ultimately provide at least the overall financial benefits that the UK safeguarded benefits scheme intended as a promise.
Don’t go in blind! Get advice that means you can estimate how likely it is that you will do at least as well. Of course, if you are looking for benefits that the UK safeguarded benefits scheme cannot offer (for example: the possibility of passing more generous benefits to your partner and family than the UK safeguarded benefits scheme offers), then fine – but at least be aware of everything that you are giving up.
Defined benefit transfer risk 2
This is a subset of the first, losing the intended promises in the UK scheme. That UK scheme aims to give you stated benefits for the whole of your life (and, usually, your partner after you if they outlive you). There is then a risk that if you transfer into a QROPS that, unless you manage it carefully, you will live far longer than you might think, and run out of funds before you and your partner die – something that would not occur in the UK scheme.
Take a long hard look at how long you might realistically live for, and then work out on an equally realistic basis how much you can take from your QROPS if it is to at least see you out (and if you die younger, of course, the more is left for your partner and family).
Transfers of these safeguarded benefits, if valued at over £30,000, have to be signed off by a pension transfer specialist.
These professionals should be able to tell you honestly whether you will lose any benefits by transferring, or whether a transfer will be right for your retirement needs and objectives.
Can I avoid tax by transferring my pension?
Depending on where you move your pension to, where you are tax resident and where you are tax resident when you retire, you may legitimately be able to reduce your tax liabilities on your pension or pension income.
Don’t forget your QROPS has to comply with the UK tax law conditions detailed above. But it is possible for a scheme to comply with these and be in a low or even no tax jurisdiction.
Furthermore, where you’re resident for tax can have a bearing on whether you pay tax when you receive your lump sum and/or pension income.
Very specialist advice needs to be sought. Do not just assume you can benefit from tax reduction or deferral.
Which are the best countries for QROPS?
Assuming it’s in your best interests to transfer to a QROPS and you would not be liable to the overseas transfer charge now or in the future, the jurisdiction most appropriate for your transfer will depend on many things including your jurisdiction of tax residence, where you plan to retire and any relevant double tax agreements (DTA).
Therefore you have to have personalised advice.
A popular jurisdiction is Malta; Gibraltar is also sometimes chosen. There are many other jurisdictions to choose from as well.
Malta, and to a lesser extent Gibraltar are popular largely because of their highly regulated, low tax environments and in the case of Malta their many DTAs. However, neither may be appropriate for you, and there are other choices.
Should I transfer my pension?
Considering all the foregoing information and advice, the answer to this question is simple…
Seek professional advice.
You need to have a comprehensive and specialist appraisal done of your pension assets, your personal financial and tax position in general, and your retirement plans.