Expatriate Tax Strategies and Pensions
George Osborne announced in the spring budget on the 19th of March 2014 the most radical overhaul of UK Pension Law since the introduction of the Old Age Pension in the Old Age Pension Act 1908.
Possibly in reaction to the rising number of people using pension liberation schemes to free the cash tied up in their pensions, the Chancellor announced flexible new changes which could benefit some expatriates. The major changes can be summarised as follows:
Current legislation does not allow the withdrawal of the fund in cash. You can take 25% in cash tax free but can only access the rest of your fund via drawdown of income or by purchasing an annuity. Either way the income is taxable. The important change is you can now access 100% of your cash.
25% is available tax free and you can draw down the rest of your fund as well.
The sting in the tail is you will have to pay tax on the balance of your fund. For anyone with a sizable fund this could mean a tax rate of 45% .
The second change which may benefit expatriates with funds of less than £30000 is that from the age of 60 these funds can be withdrawn as a lump sum. Once again 25% is tax free and the balance taxable.
There are also changes to the criteria to drawdown income in stages. Previously there was a requirement that you had to have an income based on pension of at least £20000 to take down unlimited drawdown .This is now reduced to £12000. This relaxing of what many people felt were unreasonable restrictions on access to their own money are obviously good news for people planning their retirement.
Expatriates already have access to Pension Funds which include far more flexible benefits to investors at the time of retirement. The chancellor made no changes to the treatment of the transfer of the funds on death. Your dependents would face a tax liability of 55% on the fund transferred to them on your death.
The alternative solution available to Expatriates is to transfer your UK pension funds to a Qualifying Recognised Overseas Pension which is written in far more flexible legislation which may have significant tax benefits for Expatriates.
Expats need to consider if a QROPS pension, short for Qualifying Recognised Overseas Pension Scheme, is right for them.
QROPS are tax-effective pensions for British expats or international workers with UK pension rights who have decided to live away from the UK permanently or those looking at their retirement options should they move abroad.
QROPS are often called ‘offshore’ pensions because the providers work from financial centres outside the UK, as opposed to ‘onshore’ pensions which are UK based. More than 3,000 schemes are available around 46 countries, so the choice is vast.
Rather than dealing directly with a provider, retirement savers work with a trusted financial adviser who will tailor a QROPS to their personal financial circumstances, taking into account tax rules of the country where the scheme is based and those of the country where the expat lives.
Because of local laws and other business or administrative reasons, although all QROPS are based on the same HMRC tax and financial template, some of the conditions and benefits vary between countries or even providers in the same country.
Always check with a regulated and experienced financial adviser for the latest information about specific QROPS and the latest tax rules. With that in mind, here’s a look at the reasons why you might want to invest in a QROPS:
Lump sum flexibility
Most UK pensions limit the cash lump sum available to 25% of any pension fund value, but many QROPS can stretch that to 30%, providing the scheme keeps 70% of the original transfer pot to provide a retirement income.
Local pension rules determine if part or all of the growth in funds are available as a cash lump sum.
For example, if £120,000 was transferred into a QROPS and the fund grew to £150,000, a quarter of the original transfer – £30,000 – is available as a cash lump sum.
Some QROPS pay that same £30,000 but add a percentage of the fund growth as well to swell the tax-free payment.
The rules about drawing an income from a QROPS are similar to those governing onshore pensions.
UK pension providers use GAD tables to calculate the amount available. GAD is short for the British government actuary’s department, who are the team of boffins who work out payment rates.
The amount of drawdown or income paid depends on personal factors, like life expectancy, financial goals and investment performance. This is calculated by the trustees running the schemes. The calculation used is determined by the laws and rules in that jurisdiction.
For example, Isle of Man QROPS pay the equivalent of around 155% of UK GAD, but Malta QROPS and New Zealand QROPS set levels similar to UK GAD.
Estate and succession planning
Any funds left in a QROPS on the death of the investor can be passed on tax-free to the beneficiaries of the estate, providing they live outside the UK.
The investor has no obligation to draw any payments immediately, so can leave the pension fund intact to pass to family or loved ones. However, generally at age 70 or 75 he must start taking some benefits.
After five full tax years of non-UK residence, funds in a QROPS are generally outside of the reach of UK inheritance tax, although the country where the investor is resident at death may request some tax.
Income tax on payments
If you live in the same country where your QROPS is based, payments will be taxed according to local rules.
If you live in a separate country to where your QROPS is based, tax depends on whether the country where you live and the country where your QROPS sits has a tax treaty.
If they do, there may be some tax breaks available to you.
Marrying your country of residence and the location of your QROPS is extremely important. An experienced independent financial adviser can help you to achieve this.
Another option is to use a company offering a multi-jurisdictional scheme. These are QROPS that can be moved to different financial jurisdictions by the same provider. This can reduce the cost of exit and entry fees.
Beating exchange rate fluctuations
A UK pension can only pay out in Sterling, regardless of the currency of the country where you live, so you face complicated timing issues to make the best of ever changing currency rates.
However, a QROPS can invest and pay out in most currencies, reducing exchange rate fluctuations and avoiding the hassle of timing transfers to get the best rate.
A good financial adviser can also get you better currency exchange rates by using a bespoke FX broker.
Investment selection and management
QROPS offer a range of options to suit your investment preferences and attitude to risk – from self-managed funds to managed investments.
The range of investments is much broader than in an onshore pension, offering more currencies, commodities, offshore bonds and access to international markets.
This flexibility offers the chance to match your investment profile to the currency, inflation rate and lifestyle of your new home overseas.
Portability and convenience
QROPS are designed to cater for expats and international workers with a mobile, international lifestyle.
You can base a QROPS in one country and move between others without affecting the underlying investments.
QROPS have no minimum investment rules, although these may vary between providers.
Retirement savers can consolidate any number of small, UK pension funds in to one larger and easier to manage QROPS to save charges and maximise potential investment growth.
Some expats may find switching small pension funds may not be cost-effective, and some workplace or public sector pensions may have additional benefits that will be lost on transfer to a QROPS.
Do all offshore pensions qualify as QROPS?
No. HM Revenue and Customs (HMRC) publish a list of providers who have self-certified that their pension schemes meet QROPS rules. Only schemes on this list are regarded as QROPS, although a few schemes have asked for their details to be removed.
Just because a scheme is listed does not mean HMRC has recommended the scheme.
You can download the latest copy of the list from the HMRC website www.hmrc.gov.uk/pensionschemes/qrops.pdf
Who can transfer funds in to a QROPS?
Anyone with UK pension rights who no longer lives or intends to live in the UK. Expats working abroad temporarily who are still UK residents do not qualify.
Tax and financial planning advice
The implications of cross-border tax planning can have costly, unforeseen consequences. An experienced international financial adviser should have a backup team that can make sure the choices before you are tailored to your personal financial circumstances.