Expats generally have the right to transfer their pension abroad into a qualifying scheme. For some, the benefits of doing so are manifold. However, there are risks, and it’s fair to say that you need to tread very carefully when considering all your options.
By James McLeod, Head of Pensions at chartered financial planners AES International.
The majority of British expats lose the right to benefit from 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 overseas 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. 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, without being taxed on the transfer.
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 (as described below), and to inform HM Revenue & Customs (HMRC) that it does 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.
Not all QROPS accept transfers. For example, many schemes are open only to employees of a particular organisation.
What are the important rules to know about QROPS?
In order for an overseas scheme to qualify as a QROPS, and therefore be eligible for your pension to be transferred without incurring a tax charge of potentially up to 55%, the scheme has to meet three clear conditions.
1.Tax recognition conditions:
The scheme must be recognised for tax purposes in the jurisdiction where it’s established.
It must also meet the following conditions:
- The scheme has to be open to people living in that jurisdiction.
- The jurisdiction gives tax relief on member contributions, and payments out will be taxed or vice versa.
- The scheme is recognised by or registered with the jurisdiction’s tax authority
2. Regulated pension scheme conditions:
If there is a pensions regulatory body in the jurisdiction where the scheme is set up, the pension scheme must be regulated by that body.
If there is no regulatory body, the scheme must either:
- Be set up in an EU member state, Liechtenstein, Iceland or Norway; or
- Use at least 70% of transferred funds from the UK to provide a pension for life, which cannot normally be paid before age 55.
3. Recognised overseas pension scheme conditions:
The same tax rules on benefits have to be applicable to tax residents and non-residents.
The scheme must meet at least one of the following conditions:
- The scheme is set up in an EU member state, Liechtenstein, Iceland or Norway; or
- The scheme is set up in a jurisdiction (other than New Zealand), where the UK has a double taxation agreement with that jurisdiction that contains exchange of information and non- discrimination provisions; or
- The scheme is a ‘KiwiSaver’ in New Zealand, or
- The scheme is open to those resident in the jurisdiction where it is set up and at least 70% of the transferred funds will be used to provide a pension for life, which normally cannot start earlier than age 55.
Where can I find a list of qualifying schemes?
HMRC has a list of ROPS and updates the list on the first and the fifteenth of each month.
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. The list is essentially of very limited (if any) value.
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:
- Up to a 30% lump sum, which may be tax free in the member’s jurisdiction of residence;
- 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;
- 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);
- Only 90% of pension income from a QROPS is taxable on a return to 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 SIPPS in the UK);
- Beneficial for those who wish to lose the UK as their domicile of origin, perhaps as part of an IHT strategy and/or;
- 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, general ones (and two extra for transfers from UK defined benefit schemes) that at the least you should be aware of are:
Your adviser/salesperson is 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, certified by the Chartered Insurance Institute (CII). 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.
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 authorised by a proper financial authority and that redress procedures are available if anything goes wrong. Avoid funds promising results far beyond the ordinary, 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’re tax resident and where you’re 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, 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.