Pension options for British expats
WITH thousands of British nationals living abroad, many have found themselves the target of marketing campaigns urging them to move their existing pension into an overseas scheme.
What many don’t realise is that this type of scheme – called a qualifying recognised overseas pension scheme (QROPS for short) – is not the only option and, in many cases (if not most), might not be the best route to take.
UK nationals who move abroad have three main options. They can leave their pension savings where they are (often best if they plan to return to the UK before retirement), transfer them to a self-invested personal pension (SIPP) or transfer to a QROPS. The best option for you will depend on your personal circumstances. Let’s take a look...
The case for a SIPP
A SIPP is a UK-based pension arrangement governed by UK pension legislation and, therefore, part of an extremely well regulated jurisdiction.
Capital and income can be accessed from age 55, when you can take 25% as a tax-free lump sum. Depending on where you are in the world, you could also draw a tax-free income via a double taxation agreement.
SIPPs enable you to invest in a wide range of asset types. Charges are usually fixed amounts, though insurance-based schemes often charge a percentage of the fund value so as the fund grows, so too does the cost of investing.
Following death, the inheritance tax (IHT) position depends on whether the SIPP is ‘vested’ or not (whether you’ve taken any benefits), with a tax charge of either 0% or 55% applying to any lump sum payment to beneficiaries.
The case for a QROPS
Generally, a QROPS must behave as if it were a UK pension for investors who have been UK resident in the previous five tax years. If you return to the UK, the QROPS will become subject to UK pension regulations.
However, for investors who have been non-resident in the UK for at least five tax years, the QROPS becomes subject to the laws of the overseas jurisdiction in which it is based. Consequently, you can take income with no limits and there will be no deduction of tax at source (although taxation will apply in accordance with your current country of residence).
Following death, regardless of whether the QROPS is vested or not, any remaining fund can be paid as a tax-free lump sum to the nominated beneficiaries.
SIPP v QROPS
QROPS are significantly more expensive than SIPPs. Especially in a pension’s formative years, it is important to keep cost down. As a very general guide, SIPP fees may be in the region of £250 per year compared to £995 for a QROPS – not an enormous difference, but unless you’re getting something for the extra cash why spend it?
QROPS also make it more complicated to take benefits if you return to the UK and reacquire resident status.
Saying that, in the right circumstances, they can offer huge benefits that a SIPP can’t match, especially if you retire overseas. This is for three main reasons:
- Increased flexibility in taking a tax-free lump sum. Essentially, you can take more from a QROPS – at least 5% more, but possibly much more. While increased flexibility is positive, taking too much cash out of your pension is not advisable.
- Income is paid gross, whereas income paid from a SIPP might be subject to 20% tax at source if there is no double taxation agreement in place between the UK and your country of residence.
- Post retirement, QROPS are not subject to IHT on the death of the member (providing the member has been a non-resident in the UK for at least five consecutive tax years). This gives a huge advantage over SIPPs, which are subject to a 55% tax charge on death.
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