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Transferring UK pensions to a QROPS can offer expatriates flexibility, tax, estate planning and currency benefits, but is it suitable for everyone?

One of the many pension options available to British expatriates today is transferring to a Qualifying Recognised Overseas Pension Scheme (QROPS). 

QROPS are foreign pension schemes recognised by HM Revenue & Customs (HMRC) to receive tax-free transfers from UK-registered pension funds. They were introduced in 2006 to help Britons who have permanently moved abroad simplify their affairs by taking their pension savings with them.  

Despite being widely seen as the answer for expatriate retirees, QROPS are by no means a one-size-fits-all solution. Here we explore some of the advantages and disadvantages of moving UK pensions to a QROPS.

Tax efficiency

Currently, EU residents can transfer one or more UK pensions into a QROPS without taxation, while transfers outside the bloc attract the UK ‘overseas transfer charge’ of 25%. There are expectations the UK could extend this within the EU/EEA after Brexit, so time may be limited for tax-free transfers.  

Once in a QROPS, funds are sheltered from UK taxes on income and gains. They also no longer count towards your lifetime pension allowance (LTA), so can grow unlimited without attracting LTA penalties of 25% or 55% when accessing your money.

While QROPS funds become taxable once you start taking benefits in your country of residence, many expatriates resident in Europe can receive favourable tax treatment.

QROPS funds only become taxable once you start taking benefits in your country of residence, but expatriates can usually receive favourable tax treatment.

  • QROPS and UK pensions in Portugal

Portuguese residents accessing QROPS or UK pensions will attract the progressive Portuguese income tax rates ranging from 14.5% to 48%. However, if you are a non-habitual resident (NHR), so long as you withdraw your funds over a minimum of ten years, you can enjoy tax-free pension income for your first decade in the country.

If you do not qualify for NHR, it may be more beneficial to reinvest UK pension funds into an alternative tax-efficient structure suitable for Portugal, so make sure you explore your options.

See more about how you are taxed in Portugal

  • QROPS and UK pensions in France

Usually, pension and QROPS income is taxable in France at the income tax scale rates starting at 14% from €9,964, up to 45%. Under certain conditions, however, you could take your whole fund as a lump sum and pay just 7.5% tax with an uncapped 10% allowance. 

Pension income also attracts 9.1% social charges (7.4% for pension income under €2,000 a month, €3,000 per couple) unless you hold EU Form S1 or are not affiliated to the French healthcare system. 

For French residents, reinvesting pension funds into a suitable assurance-vie – a specialised form of life assurance where the underlying investments attract no tax in France – may actually be more beneficial than a QROPS.

See more about how you are taxed in France

  • QROPS and UK pensions in Cyprus

Under certain circumstances, it is possible for Cyprus residents to withdraw QROPS funds as one lump sum tax-free.

Otherwise, QROPS withdrawals and UK pension income are taxable in Cyprus in one of two ways. You could either choose a flat rate of 5% (with a €3,420 allowance) or add it to your annual income and pay the relevant scale income tax rates. This is zero for income under €19,501, otherwise rates between 20% and 35% apply.

Lump sums from a UK pension can be taken tax-free, but 75% will be taxable in the UK if you withdraw it all at once.

See more about how you are taxed in Cyprus

  • QROPS and UK pensions in Spain

When accessing QROPS or taking UK pension lump sums and income, the general Spanish income tax rates apply for residents. These vary regionally but range from 19% to 48%.

Depending on your situation, it may be more beneficial to reinvest UK pension funds into an alternative tax-efficient structure that is compliant in Spain, so make sure you explore your options.

See more about how you are taxed in Spain

Flexible access

While UK pensions can be restrictive, many QROPS allow you to take as much cash or income as you like, however and whenever you want. You could, for example, draw a higher income in early retirement when you are most active and reduce it in later years. Or you could take a lump sum and preserve the rest for a rainy day or for future generations. 

However, with this freedom comes more potential to exhaust your funds – unlike a UK annuity or ‘final salary’ pension which provide a guaranteed income for life. 

See six questions to consider before transferring a final salary pension

Diversification and investment choice 

QROPS usually offer more options than UK pensions for how your money is invested, and are not as over-exposed to UK assets. You can choose a flexible investment plan across a wide range of funds to suit your circumstances, objectives, timeline and risk appetite. 

As the value of any investment can go down as well as up, this introduces an element of risk to your retirement funds that is absent from a guaranteed annuity. However, an active, well-diversified investment approach can manage and minimise risk.

Estate planning flexibility

While most UK pensions are only payable to your spouse on death, QROPS offers the option to include other heirs. So rather than dying with you or your spouse, your pension wealth could pass to any named beneficiary, even across generations.

QROPS may also offer some protection from UK inheritance tax when passing pension assets to non-UK resident heirs, although they may still be subject to local succession taxes

Multi-currency options

While UK pensions only pay out in sterling, some QROPS allow you to invest your funds and make withdrawals in more than one currency. This is a major advantage for British expatriates living abroad as it reduces dependence on pound/euro exchange rates and removes currency conversion costs. 

Freedom from UK rules…to a point

Funds in a QROPS are no longer governed by UK pension legislation, so are protected from future changes to UK rules. However, you could still be subject to UK legislation – and taxation – if you transfer funds again to an unapproved scheme within five tax years (for funds transferred after 8th March 2017), or if you permanently return to the UK within ten years. 

Note also that the goalposts for QROPS are highly likely to shift in the future, especially after Brexit. Since their inception in 2006, the UK government has made numerous revisions to pension transfer rules and delisted thousands of QROPS from various jurisdictions. There is now far more complexity in the QROPS market than people realise.

For example, currently there are no Portuguese, French or Cypriot QROPS on the HMRC list of approved QROPS. Expatriates resident in those countries therefore need to take care to choose an eligible scheme in another EU/EEA country, such as Malta, to avoid transfer penalties

Where HMRC deems that its rules have been broken, it can charge a 55% tax penalty on the transfer amount – potentially even if you had moved funds before the rules changed.

Regulated, tailored advice is crucial

Overseas pension transfers are a complex area – and a key target for pension scams – so regulated advice is essential. Take extreme care to explore your full range of options – before Brexit potentially changes things – to establish the most suitable pension solution for your particular circumstances.

If you decide to transfer, make sure you take specialist guidance to find a suitable product, navigate the cross-border tax and jurisdiction issues, and ultimately secure your long-term financial security in your country of choice.

Find out about our pension planning services

 

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.