If you have built up a UK pension fund and now are no longer UK-resident, or intend to become non-resident, you may not realise that your pension is still subject to UK taxation rules. You might have moved abroad to escape the UK, but if your pension has not, it is still subject to UK pension rules and restrictions.

Before 2006, it was generally only possible for a person to transfer his or her UK pension to an overseas pension scheme located in the person's new country of residence. Modernisation and simplification of UK pensions legislation in 2006 removed this restriction. This not only enables an individual to freely transfer a UK pension overseas, it also therefore gives choice over where to transfer a UK pension.

It should be noted that legislative changes in April 2015 have meant that UK pensions now become much more flexible to access in the drawdown period. Previously there was a requirement for a £12,000 guaranteed pension income to be in place before being able to access additional funds. 25% of funds accessible will remain tax free but the remaining 75% would be taxable at the individual’s marginal rate of income tax (up to 45%).

WHAT IS A QROPS?

Qualifying Recognised Overseas Pension Schemes (QROPS) are special overseas pension schemes which satisfy rules and regulations laid down by UK legislation. Since April 2006, implementation of the 2004 Finance Act has made it possible for UK pensions to be transferred to any overseas pension scheme which is registered with HMRC as a QROPS. Further amendments to QROPS legislation were passed in April of 2012 and more recently in April 2015.

Legislative changes introduced in April 2012 mean that a QROPS must report payments annually for the first 10 years after its establishment to Her Majesty's Revenue and Customs (HMRC). This reporting requirement is now necessary even if the member has not been UK resident for longer than 5 years, which was previously classified as an exemption. Once the 10 year period has passed, reporting requirements fall away and the QROPS will follow the regulations of the country in which it is based. In many cases, those regulations are considerably less restrictive than in the UK.

WHAT ARE THE BENEFITS OF A QROPS?

If you have a UK pension scheme, and you have been (or will be) UK non-resident for at least 5 years, there are a number of possible reasons to consider transferring your UK pension to a QROPS:








Even if you have left the UK, your UK pension continues to be subject to UK tax laws and restrictions should it remain in the UK. Under the most recent legislation introduced in April 2015, if you are drawing an income from a UK pension when you die, the pension assets will be liable for tax should you be over 75 at death (tax free below age 75). A charge of 45% will be levied on your personal pension assets if a lump sum is taken or at the applicable marginal rate in the case of drawdown. This rule applies regardless of where you live.

QROPS, however, are non-UK pension schemes. Transfer of a non-resident member's pension assets on death to another family member is not subject to any inheritance tax deduction. The full value will be paid out to whichever beneficiaries you have nominated, either as a cash or as an income. Without question this beats losing up to 45% of your pension to the UK taxman !


QROPS offers the widest possible investment choice. Investment management can either be self-directed by the member or delegated to an investment manager appointed by the member. You are able to choose from a range of investments, ranging from bonds and equities to commodities and alternative investments. This enables you to match your pension investments to your own risk profile, preferences and objectives.


If your pension remains in the UK, the fund will be invested in Sterling based assets. If you have become used to another base currency, this may no longer be appropriate. For example, if you intend to remain in Asia, a US Dollar based pension may be more appropriate. If you retire to Spain, you may wish your income to be in Euros. Most QROPS will allow you the freedom to make such a choice.


If you have a number of UK Pension schemes, these may be consolidated into a single QROPS. This simplifies administration and may offer the opportunity to reduce total pension charges.


The EU savings directive provides for the deduction of tax, or exchange of information, in respect of interest earned in member states by residents of other member states. Both the Channel Islands and the Isle of Man are parties to this agreement. Interest earned by investments within a QROPS is not subject to this tax treatment.


Income and capital gains arising from the investments held within the Plan, or benefits paid by the Plan, are not subject to UK tax. This means that a QROPS provides a very efficient tax free environment in which your pension assets can grow.

SOME MISCONCEPTIONS


In December 2014 HMRC issued draft legislation which intended to permit overseas schemes to offer the same pension flexibility as the UK with effect from April 2015. However, a Statutory Instrument was introduced in March 2015 which retains the existing QROPS legislation requirements temporarily. The existing rule is to be given further consideration to ensure that the principles behind allowing pension transfers free of UK tax can continue to operate as Parliament had intended.

The current legislation is entirely clear on this subject. At least 70% of the value of the transfer must be used to provide a pension for life. If this rule is breached, the QROPS trustees will jeopardise their approved status and the scheme member will be subject to a tax charge of 55% of the value of the withdrawal

The QROPS provider must initially mirror the UK pension system for the first 5 years of a member's non residency and then follow the legislation of its own country. This currently means that lump sum benefits withdrawn in the first five years of non-residency are limited to 25% but thereafter, in Gibraltar for example, the payment of a lump sum can be 30% of the scheme value.


If a loan is advanced by a QROPS, the debt becomes an asset of the fund and is defined as "taxable property". As such, it will be subject to a tax charge of up to 55%.


Residential property is defined in the legislation as "taxable property". If a QROPS purchases taxable property, the value of the purchase will be subject to a tax charge of up to 55%. Other examples include antiques, jewellery and fine wines. The tax charge applies irrespective of how long the member has been non-resident.