The overseas pension known as QROPS (Qualifying Recognised Overseas Pension Scheme) has experienced a surge in popularity since it launched in 2006. It is HMRC-recognised, and there are myriad benefits for expatriates and individuals considering an overseas move. After all, QROPS were designed specifically with the 21st-century expat in mind.
The language surrounding the QROPS can seem complicated. However, a QROPS operates outside of UK regulations and tax laws, so qualifying expats should seriously consider one. Read on for a breakdown into the sizable benefits of a QROPS.
Within a QROPS, your pension fund and contributions are not subject to capital gains or income tax. Also, many QROPS will allow you to withdraw up to 30 percent of your pension as a tax-free lump sum, as opposed to 25 percent maximum in the UK.
Pay Local Jurisdiction Rates
If your local jurisdiction permits it, the gross income from a QROPS can be paid out to you, as you are liable only to your local taxes. In many countries, income from QROPS may be structured so that you pay less tax or no tax each year, as opposed to a conventional UK pension income tax. This practice extends to offshore funds, which you may access where they are domiciled.
Pension income paid under a QROPS is classed as a Foreign Pension. Upon returning to the UK, only 90 percent of the pension income from a QROPS is taxable.
No Lifetime Allowance Charge
The UK sets a limit on the amount of tax relief you may receive before additional taxes. If your total pension fund exceeds the lifetime allowance (currently £1,000,000 in 2016), you may be taxed up to 55 percent on the excess. This rule applies to all of your pension savings.
In a QROPS, you will not be taxed, even if your fund grows beyond the lifetime allowance, and there is no cap on the amount you can transfer in. So, if your UK pension fund is close to breaching the lifetime allowance limit, a QROPS will alleviate this problem.
A QROPS may allow you to retire earlier than you could in the UK, with open access to your pension fund. For example, income can be taken from 55 years old, but funds can be accessed earlier depending on circumstance, such as ill health. Some QROPS jurisdictions allow access from age 50.
When you transfer your pension fund into a QROPS, you can choose to nominate your beneficiaries, making the transfer of wealth quick and easy. There are fewer restrictions than in the UK where, for example, the age difference between spouses may reduce the spouse’s pension.
Payout for Your Dependents
If when you die you are a non-UK resident, and have been for more than five full consecutive UK tax years, the remainder of your QROPS fund can be paid to your surviving family members free of UK death taxes. A Lump Sum Death Benefit Tax on pension funds is deducted at 55 percent in the UK. A QROPS is not subject to this tax, or to the inheritance tax, which can run as high as 82 percent.
If you do not have a spouse or a dependant, transferring to a QROPS will allow you to pass on a lump sum to a beneficiary of your choosing.
A UK pension receives payments in GBP Sterling, but a QROPS can be paid out in any major currency. If you live in a different country, exchange rates will fluctuate, changing what you receive from one month to the next. Further, currency conversion costs money and takes time. A QROPS can help you avoid these issues.
If you own two or more different pension funds within the UK, you can consolidate them into a single QROPS. This makes the administration and management of your fund easier. Investing is difficult enough without having to navigate strategically through multiple funds. Also, QROPS operate on a fixed-fee basis, as opposed to UK pensions which have percentage-based fees.
In the UK, HMRC’s regulations change constantly, as influenced by politics. The UK government has made changes that inhibit pension members’ ability to shelter tax through pensions. For example, the annual contribution allowance fell from £255,000 per annum in 2010 to only £40,000 per annum in 2014.
Some UK pension schemes have been criticised for being too confusing, and leveraging unexpected changes that cause unpleasant surprises for pension holders. With a QROPS, you can avoid the sea changes, and maintain a grasp on the regulations surrounding your money.
UK stakeholder pensions and traditional personal pensions offer limited options for investment. A QROPS, on the other hand, gives you large amounts of freedom to develop a retirement investment portfolio that suits your specific criteria. A QROPS can also assist a member with achieving non-domicile status for other assets, if pension benefits are held outside of the UK.
You can diversify a QROPS by investing in different asset classes in a wide range of worldwide funds. As opposed to being limited to funds within the UK, a QROPS will offer investments into equities, fixed-income products, and money market instruments all across the world. Sometimes, these funds aren’t even available to UK retail investors. A QROPS also may offer greater flexibility with respect to income drawdown, where the income you get will vary depending on the fund’s performance.
Break Free From Annuities
Until recently, UK pension funds were required to include a type of investment called an annuity. An annuity is a contract that pays a fixed and guaranteed lifetime income, and is not subject to stock market fluctuations. That requirement was recently discharged, but the majority of UK pension funds still include annuities. Annuities have a lot of downsides: income is subject to tax, and some annuities cannot be passed on when you die. Also, they do not offer protection against inflation, and yields are often low. With a QROPS, you can avoid the drawbacks and the inflexibility of annuities.
As you can see, transferring to QROPS may maximise portability and flexibility for you and your family. Typically QROPS will offer more flexibility in the form of investment options, timing of benefits, and dealing with funds after death. Note that in some cases, transferring to QROPS may cost more than remaining in a UK scheme, so make sure to consult local advice where you are a tax resident.