If you are an expat and have a pension languishing back in Britain, you really ought to be taking some advice about how to reignite your retirement savings with a Qualifying Recognised Overseas Pension Scheme (QROPS).
Most expats do not know much about the financial and tax advantages of a QROPS because the pensions are not available in the UK.
They were set up a decade ago to ease access to pension funds for British expats in the European Union and have mushroomed from there.
Now, more than 1,200 QROPS are offered in 42 financial centres around the world.
QROPS are the superheroes of the financial world. They may not have a range of remarkable powers, but they do come with a number of benefits that extend or enhance an onshore pension.
Here’s a selection that can help British expats make the most of their money.
Bigger tax-free lump sum
Take up to 30% tax-free cash with a QROPS compared to the 25% available from a UK based pension.
According to financial firm Old Mutual Wealth, the average fund is close to £170,000. A 30% tax-free cash lump sum is £51,000, compared to £42,500 if the fund is left in the UK – a £7,500 difference simply for having retirement savings in a QROPS rather than onshore.
Pension regulators in Malta have recently changed QROPS rules so that every provider can offer the 30% cash bonus.
This benefit is a real no brainers for expats living in countries where income tax is due on pension payments as their tax-free pay-out is effectively upped by a fifth putting the money in their bank rather than in the tax man’s coffers.
Uncapped lifetime allowance
The lifetime allowance – the amount a pension pot can grow to without penalty – has shrunk from £1.8 million to £1 million over recent years and is set to rise in line with inflation for the foreseeable future.
This cap only applies to onshore pensions. Providing a fund transferred offshore to a QROPS is less than the lifetime allowance, HM Revenue and Customs (HMRC) will not apply tax penalties for breaching the limit.
Once the fund has reached the sanctuary of a QROPS, the lifetime allowance no longer applies and the fund can continue to grow to any size without the fear of penalties.
Any expat retirement saver expecting their pension fund to break the £1 million barrier in the future can easily avoid penalties by switching to a QROPS.
No tax on transfers to QROPS
Switching one or more pension funds to a QROPS is just like transferring money between pensions in the UK.
The fund is transferred without any tax payments, including the full amount of any tax relieved contributions so expats do not lose any HMRC top up on contributions made in the UK. This allows expats to transfer the full value of their onshore pension into a QROPS.
A QROPS transfer becomes a no loss transaction and is free of any tax charges.
Pensions paid gross
Forget about reclaiming overpaid tax on pension payments with a QROPS. Pension benefits are paid gross – that is without income tax deducted at source.
British pensions are typically paid net of basic rate tax, although expats can apply to HMRC to have the payments made gross.
Gross payments make keeping track of income tax a lot easier as the liability on QROPS payments is due in the country where the expat is tax resident.
Any tax payment is at the prevailing rate for that country, not the UK. That can be a zero tax nation such as the United Arab Emirates cities of Dubai or Abu Dhabi.
The income does not have to be reported in the UK, although HMRC will expect reports from the QROPS provider for some years about withdrawals to ensure no tax rules are broken.
Increasing expat spending power
QROPS make juggling foreign exchange rates disappear for expats.
Providers will pay out benefits in a range of major currencies direct into an expat bank account.
For expats, the days of keeping an eye on exchange rates to find a favourable rate for swapping pounds are gone.
Getting pension cash paid in local currency saves bank charges and helps with maintaining spending power for expats with an eye on a budget.
Currencies include US dollars, the euro, Australian dollars and the Indian rupee.
This facility built in to just about every QROPS eliminates foreign currency exchange rate problems that can dog expats and erode their spending power.
Exchange rate risk is often underestimated by expats.
Exchanging £10,000 to euros in June 2005 saw a rate of 1.5, giving 15,000 euros.
This exchange rate dropped to 1.15 giving 11,500 euros by March 2013, peaking at 1.44 giving 14,400 euros in July 2015 before plunging back to 1.15 in August 2016.
QROPS can smooth this topsy-turvy rate change by taking in a Sterling transfer but paying out in assets denominated in a local currency.
Saving on fund charges
Consolidating two or more onshore pensions into a single QROPS can be an attractive proposition.
Managing just one fund makes life a lot easier.
Instead of keeping paperwork and paying administrative charges on two amounts, consolidating allows retirement savers to put all their retirement cash in one place, reducing paperwork and often slashing charges as well.
Keeping one pension fund also helps expats keep a tab on investment performance.
Pension freedoms introduced in April 2015 have proved popular with retirement savers over 55 years old, with more than £8 billion withdrawn in the first year.
Flexible access is a little more complicated for QROPS, but is still an option.
The rule is pensions within the European Union plus Iceland, Norway and Liechtenstein can follow flexible access at the discretion of the provider. However, not many providers have stepped up to the mark with this.
The only QROPS centre to effectively embrace pension freedoms is Malta, where the regulator has passed laws allowing all providers to offer flexible access to all QROPS savers – but only one has taken up the opportunity although others have expressed an interest in following.
Guernsey and Gibraltar have indicated they want to relax pension rules to allow flexible access as well.
Outside of Europe, QROPS providers have to follow the 70/30 rule – offering a maximum 30% of the fund as a tax-free lump sum while ring-fencing the remaining 70% to provide a pension in retirement.
If flexible access is a priority for expats outside Europe, Malta offers ‘third party’ QROPS that allow retirement savers to live where they like in the world, which effectively expands pension freedoms outside Europe.
Enhanced investment opportunities
QROPS do not offer a magic, get-rich-quick route to instant wealth, but they are efficient tax and investment wrappers for expats.
A wrapper is basically a set of characteristics of a financial product that benefits specific types of investor.
The QROPS wrapper does not offer any tax incentive on the transfer of retirement savings, but once inside, the fund grows free of capital gains tax. No tax is due on disposing of investments.
Typically, 30% of the fund is available as tax-free lump-sum and the rest is paid out subject to income tax rules in the place where an expat is tax resident.
Most QROPS providers open the door on international funds, bonds, stocks and shares rather than restricting their platform to UK-centric investments.
QROPS can also hold property and other alternative investments. The rules for each pension will differ between providers and tax issues may impact staking cash in some assets.
DIY or managed pension funds?
For expats with the time and inclination to keep up with world stock markets, interest rate changes and other economic changes, QROPS come as DIY funds.
Not all expats are active fund managers, so providers have professional investment managers on hand to take on the job. For those who like a hands on approach, but want to leave some of the work to a fund manager, a halfway house of active/passive management is a solution.
The appetite for risk of an expat and how much time and effort they want to spend managing their QROPS can influence the final purchasing decision.
Transferring final salary pensions to a QROPS
For many, moving money out of a so-called ‘gold-plated’ final salary to a QROPS was not an option for many years.
Traditional thinking denounced leaving a final salary scheme for a direct contribution scheme as financial madness.
Opinions are starting to change.
A final salary scheme guarantees a pension income that is linked to cost of living increases and can come with other benefits, such as guaranteed annuity rates that give returns much above market rates and spouse payments typically at 50% of the main pension.
Switching to a QROPS means ditching these guarantees and benefits in favour of a fund linked to investment performance.
However, rule changes and concerns over underfunded company pensions are gaining traction with pension advisers.
Under inheritance tax rules introduced alongside pension freedoms, spouses are likely to gain more financially from taking unspent QROPS funds than collecting a 50% spouse pension. Instead of a share of the unspent money, they can now take all of it under the right circumstances.
Meanwhile, final salary pension promises have been repeatedly broken as more big companies fail and place their schemes with the government underwritten Pension Protection Fund.
A pension going under protection can lose up to 10% of guaranteed benefits and are subject to an annual cap on payments.
An expat retiring at 65 years old will only receive a maximum of £37,420 from a protected fund and the amount is set lower for anyone retiring earlier. For instance, a 55-year-old taking retirement has a cap of £28,414.
Employers are positively encouraging staff to take their pensions out of company schemes by offering a huge cash bonus to move – including transfers to QROPS.
Some retirement savers report buy-out bonanzas of up to 30 times predicted retirement income to leave a company scheme.
The value of final salary pensions is becoming tarnished, while expats are finding the tax incentives within a QROPS more attractive.
In short, final salary pension transfers to QROPS are an option, but the government has slapped a ban on moving cash from civil service or public-funded schemes excluding teachers, health workers, council staff and members of the armed forces from the benefits of an offshore pension.
Deferred scheme members should note that if they do not have a spouse or child under 23, then their pension dies with them, while switching to a QROPS gives the chance of passing on a lump sum death benefit to a loved one of their choosing.
Making sure a spouse who has less personal pension income than a main earner is often a priority for couples.
But often they are blinkered by the 50% spouse pension guaranteed by a final salary scheme when a QROPS may offer a better solution.
A QROPS can offer a more significant income – often the same pension payment as the main retirement saver received when still alive.
Different solutions are available. For instance, an annuity or income drawdown strategy gives an option, while nominating a spouse as a beneficiary to inherit the unspent fund is another route to consider.
Taking early retirement
The minimum pension age for drawing QROPS benefits is mostly the same as that for a UK onshore pension – 55 years old.
However, some financial centres have kept the old former minimum retirement age of 50 years old, so theoretically the possibility of giving up work is offered to a QROPS members aged between 50 and 55.
To retire before 55, an expat would need to qualify as non-UK resident for five full tax years before taking retirement.
Flexible access is not available to anyone under 55 years old as the minimum age for withdrawing benefits is 55 years old by law.
Expats can live anywhere and have a QROPS
QROPS pensions have two conditions concerning tax residence.
Some financial centres are restricted to offering QROPS to residents only. They can do this by choice, or in some cases the British government has stripped them of the right to offer pensions to non-residents.
Important financial centres that offer QROPS to residents only include Australia and Guernsey.
Other financial centres can offer QROPS to expats living anywhere in the world. These are often termed ‘third party’ QROPS.
Popular financial centres that provide these offshore pensions include Malta, Gibraltar and the Isle of Man.
These third party pensions come with a string of benefits for expats –
- Anyone living in a country without a QROPS provider can still transfer their UK pension cash offshore and gain all the benefits of a QROPS
Third party QROPS are currently popular with oil and gas contractors hunkering down in countries with a low cost of living, such as The Philippines, Malaysia and Thailand.
- Malta QROPS come with pension freedoms
- Expats on the move can save money on transfers and charges by basing their QROPS in a third party country while having the freedom to live and work where they wish. Their pension stays put while they move around, saving them early exit and transfer fees incurred if they move between financial centres.
Who can have a QROPS?
Tens of thousands of British expats qualify for transferring their UK pensions into a QROPS, but many do not realise the benefits and little guidance is provided by UK financial advisers.
Expats can consider a QROPS if:
- They are tax resident in any country except the UK and have a pension held in Britain except the state pension, a public sector or civil service pension
- They plan to leave the UK in six months or less and have a pension held in Britain except the state pension, a public sector or civil service pension
- Any international worker who has spent time in Britain who has money in a UK onshore pension who now lives outside the country
The bulk of these workers would be from Commonwealth countries, such as India, Pakistan, Australia, New Zealand and South Africa.
… And who can’t have a QROPS
Expats who have public sector or civil service pensions have even less of a choice about transferring their pension to a QROPS.
The public sector includes the National Health Service, councils, police and Armed Forces, but also extends to government agencies and organisations.
Specific rules stop the transfer of these pensions to a QROPS.
The State Pension is also prohibited from transfer to a QROPS.
UK tax residents are also prevented from transferring pensions to a QROPS.
What happens to money in a QROPS when you die
QROPS pensions have some important death benefits.
A QROPS is not an asset included in working out the net worth of an estate, so the good news is no inheritance tax is due on any money left in the fund.
But the bad news is anyone taking money from the fund may be liable for tax, depending on the income tax rules where they are tax resident.
A likely scenario for British expats with a QROPS is that their family and loved ones who they wish to benefit from their pension savings when they die probably still live in the UK.
So although no IHT is paid on the lump sum, UK income tax rules apply to drawing down funds from the QROPS.
How much income tax is paid depends on how the money is taken and the age of the retirement saver when they die.
If the retirement saver dies before they are 75 years old, then the beneficiary can take the cash as a lump sum or regular payment without paying any income tax.
The rules change once the retirement saver dies once they are 75 years old or older.
For the tax year ending April 6, 2015, any lump sum payment was taxed at 45%.
After April 6, 2015, whether the balance of the unspent pension is taken as a lump sum or regular income, tax in the UK is taxed at the beneficiary’s marginal rate.
If the beneficiaries do not live in the UK, then their local income tax rules apply to taxing the residual cash in the pension.
The same rules apply to UK taxpayers inheriting unspent QROPS money regardless of which country the overseas pension is based in.
QROPS and bankruptcy
If bankruptcy is looming, transferring onshore pension funds to a QROPS makes any court order to access the cash or clawback pension contributions much harder – and in many cases almost impossible.
Coming home with a QROPS
Besides questions about the benefits, expats want to know what happens to their retirement savings if they have a QROPS and move back to the UK.
The answer is straightforward. As an international pension, only 90% of any benefits paid by the QROPS are liable for UK income tax.
All other benefits are the same as a UK pension except tax on the remaining fund on death.
If you pass away aged over 75, your beneficiary will pay income tax, but only on the original amount transferred into the QROPS less any withdrawals you have made.
For example, if a £200,000 pension is transferred and grows to £300,000 and £200,000 is paid in benefits, no tax is paid on the remaining £100,000.
QROPS and divorce
Although switching to a QROPS just because of an impending divorce is not recommended, arguments over how to split a pension in relationship breakdowns are as rife as those over who gets the matrimonial home and the pets.
The courts have three strategies for dealing with dividing pensions – sharing, earmarking and offsetting.
UK courts have no power to make orders to share or earmark QROPS funds.
The default position is offsetting, which means the court will take a view on increasing other assets in the UK in favour of the spouse without a QROPS to try and balance out the settlement.
Of course, offsetting is only an effective fall-back position if the couple have sufficient assets to cover the value of the transferred pension fund.
Technically, UK law does not stop anyone transferring their onshore pension into a QROPS when they move overseas although lawyers will try to argue shifting the money outside of the UK is an effort to make the pension inaccessible to the courts.
Transferring your pension to a QROPS
The first step of moving one or more frozen UK pensions to a QROPS is finding out whether the move is financially worthwhile.
Most reputable QROPS advice firms offer a free review service to help you compare your current UK pension arrangements with a QROPS.
You will need to know how much your pension fund is worth – the transfer value – and the terms and conditions of the contract.
For instance, you pension may offer a guaranteed annuity rate or other benefits that you would lose if you moved your cash to another pension scheme.
You will also need a discussion with your IFA about where you intend to live, as some countries have tax rules that impact on QROPS transfers, such as the USA.
Anyone with UK pensions can transfer their funds to a QROPS – so the review and comparison applies as much to foreign workers who spent some time in the UK paying into a pension who now live abroad as much as to British expats.
Other points that might make a difference to your QROPS transfer include the size of your pension fund.
QROPS rules do not impose any minimum fund size for a transfer, but some providers have their own rules which might reduce choice for those with funds of less the £100,000.
Other factors to take into account include whether you have to live in the same country as your QROPS is based.
Navigating all these complex rules requires expert advice from a regulated IFA with experience in the QROPS market, so be sure to check your adviser’s credentials with the local pension regulator in the country where you live.
In some countries, only locally regulated advisers can give guidance about transferring to a QROPS – Australia, the financial centre with the most QROPS, is one of them.
This article is for very basic information purposes only and does not offer or solicit an offer to invest in any way. The opinions expressed in this article do not constitute investment advice and independent advice should be sought where appropriate. Please speak to a qualified financial adviser before you consider making a pension transfer or any other financial decisions.