British expatriates who are currently benefiting from lower taxes through Qualifying Recognized Overseas Pension Scheme (QROPS) transfers may be interested to know that ‘Q-Day’ is coming on April 6th, 2012 and this may affect your tax position upon transfer. Many of the new rules involve reporting requirements, but one such provision, known as ‘condition 4’ may mean that some schemes will have to de-register as QROPS schemes. At time of writing, the Malta QROPS may be the best option due to the double taxation agreements it holds with 60 countries which gives your pension an added layer of protection. However, each case is different.
What is QROPS?
QROPS is a form of pension scheme that is based outside of the United Kingdom but is recognized by the British authorities. British citizens who are living outside of the UK can transfer their personal pensions to a QROPS and avoid the UK tax net. UK expats can then benefit in two main ways:
- The scheme allows British retirees living overseas to pay lower tax. Anyone who is considering retiring overseas and becoming resident in a foreign country for five years or more can pay tax in accordance with that of the jurisdiction which holds the QROPS. This means that expats who relocate abroad have the chance to pay lower tax on any income and capital that they receive from their QROPS. This can be a huge benefit, particularly amongst higher rate taxpayers who can pay up to 50% income tax in the UK.
- The scheme can eradicate inheritance tax: Under UK rules, once your pension is in drawdown, there is a 55% tax imposed upon death, meaning that your family won’t get all your hard-earned cash. Under a QROPS, your named beneficiaries will receive 100% of the inheritance pot as long as you have been offshore from the United Kingdom for at least five complete and consecutive fiscal years immediately prior to death.
A further benefit of the QROPS scheme is that British citizens living overseas can make investments in currencies other than GBP which avoids the risk of currency fluctuations. Expat retirees living in Europe, for example, can hold their pension funds in Euros and have their pension paid out in Euros without worrying about the GBP/EUR exchange rate. Similarly, some other countries around the world may be in a situation where their currencies closely track USD rather than GBP.
One of the biggest misconceptions about QROPS is that British citizens living abroad need to move their pension to the country in which they are currently living. This is not the case and expats can hold QROPS in the country of their choice, providing the scheme they select is valid and recognized. In fact, for tax and security reasons, this is recommended. Expats living in Oman, for instance, may be better off transferring their pensions to somewhere like Guernsey, a country that sits outside the UK tax net but offers a safer jurisdiction in which to hold your pension monies.
What are the drawbacks of a QROPS?
A QROPS can invest in almost any mutual fund available on the major stock exchanges round the world (e.g. FTSE in the UK or the S&P500 in the USA). If you decide to take more risk, by investing in emerging market funds for example (e.g. investing in blue chips in China), you may make higher or lower returns depending on the market. However, you can opt for low risk funds (e.g. bonds or gilts) or even move your pension into a high interest bank account within the QROPS if you want a more secure pension scheme.
Furthermore, QROPS are not suitable for everyone. The set-up costs associated with the scheme mean that pension funds of 30,000 GBP or less may mean it is not worth entering the scheme.
Also, pensioners who have plans that offer Guaranteed Minimum Pensions (GMP) would need to give up these rights in order to move into a QROPS.
It is extremely important that anyone who is considering taking up a QROPS consults a financial adviser who is a QROPS specialist, as this is a constantly expanding market with a number of different solutions available.
QROPS Changes to be Implemented on the 6th April, 2012
A number of changes to the legislation governing the use of QROPS will be implemented on the 6th April this year and some of the existing schemes will cease to qualify as QROPS. As such, expats are being urged to seek independent advice in order to avoid making decisions that could place their pension at risk.
Read the full article: http://www.qropsspecialists.com/qrops
