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Overseas Retirees Transferring UK Pensions Offshore with QROPS

Friday, 22 July 2011

Qualifying Recognised Overseas Pension Schemes (QROPS) offer a raft of benefits to those planning to retire abroad. The schemes have potential to reduce taxes when pensions are paid out, remove currency risk and avoid tax on any remaining lump sum available to pass to heirs. Risks do exist though so professional advice is a must.

How does it work?
Under UK pension law, one cannot gain access to pension funds until retirement at 55. However, it is now possible to move pension funds that are building up to a scheme that is resident outside the UK if it is registered as a QROPS. To qualify, the scheme must be registered with HMRC and fulfil certain criteria such as retirement not earlier than 55 and a minimum of 70% of funds to provide retirement income.

Advantages
Currently, pension payments from a UK scheme are treated as UK taxable income even if a pensioner has moved abroad. Some countries have agreements with the UK allowing pensions to be paid without the UK deducting tax but not all. With a QROPS, pension income is payable without any tax deducted at source so, for UK 50% tax payers transfer to a QROPS may make sense if local rates are lower.

Additional benefits include changing denomination to avoid currency risk (changes in income values caused by exchange rate movements) and avoiding tax on lump sums left to heirs. With regard to the latter, if at retirement pensioners opt to draw down their pension rather than buy an annuity (currently favourable due to low interest rates) any money remaining upon death can be left as a lump sum to heirs. In the UK, this suffers a tax penalty equal to 55% of the fund value. With a QROPS, the tax can be avoided because once pensioners have been non-UK resident for 5 complete tax years, those tax penalties no longer apply to a QROPS.

Risks
Some schemes purport to offer benefits that HMRC considers abusive; in particular those claiming that the whole pension can be taken as a lump sum. If HMRC pursues cases successfully the downside could add up to 55% loss on the entire pension once recovery charges and penalties are applied.

Although tax savings may be significant, they must be considered in light of the costs of transferring to a QROPS. Other benefits of existing schemes such as guaranteed income clauses should be taken into account and professional “transfer analysis” applied. It is essential that professional advice is sought before any action is taken.

If you would like further information about QROPS, please contact Neil Acheson-Gray by email nacheson-gray@rollingsons.co.uk or by telephone 020 7611 4848.