July 2014 | www.selectasset.com
How to take advantage of QROPS

How To Beat the High Taxes on British Pension Plans

You enjoy living in Japan. Why not? There’s a lot to like. Why, you might even consider retiring in Japan. If you’re a British citizen, there are certain pension advantages for retiring abroad and living abroad. Even if you are not a UK citizen, but have worked there enough to qualify for pension benefits, you should know about the latest options. Of particular importance to the globally minded is the Qualified Recognised Overseas Pension Scheme (QROPS).

What’s a QROPS? Officially, it’s an overseas pension plan that meets certain requirements set by HM Revenue & Customs (HMRC), the UK’s tax authority. Unofficially, it’s a way to escape the burden of UK pension taxes. The QROPS program was launched 2006 as a part of new legislation designed to simplify pension plans.

To become a QROPS, a pension scheme must be approved by HMRC. To see a list of approved QROPS (that wish to be published) visit the HMRC website. As recognized by the HMRC, a pension scheme is a plan that pays benefits to someone in the event of his or her retirement, reaching a certain age, suffering a serious illness or death. The “recognized” in the name, also means that the QROPS must be regulated by the tax authorities in the country where it is opened.

HMRC requires QROPS schemes to report any payments made to the member for at least 10 years from the date that the transfer took place. However, if the pension holder has been non-UK resident for five complete tax years they can benefit from more attractive options than those allowed under UK pension schemes.

What’s wrong with a typical UK pension plan?

It’s the taxes. Pension funds left in the UK are heavily taxed, in some cases up to 55%. Transferring a UK pension fund into a QROPS allows the pensioner to legally avoid UK taxation.

With a QROPS you can receive the transfer of UK pension benefits without paying UK income tax that’s withheld at source (even if you don’t live there). There is also talk of removing the personal income tax allowance for non-UK residents—ouch. This has always been a UK privilege that some other ex-pats, such as Americans, do not have. Another QROPS advantage is that while UK pensions are valued in pounds only, a QROPS allows the holder to re-base the currency of their pension plan to the currency of their residence, be it U.S. dollars, Japanese yen or something else.

QROPS holders can also take advantage of flexible investment options that allow for pension funds that cover a broad range of currencies, commodities and markets, including managed and self-invested plans. Not all of these options are open to a regular UK pension investors.

Pick your currency. Manage your investment.

How about global flexibility? A typical QROPS can be set up in one country while the owner lives somewhere else. This allows the pension to grow in a low tax jurisdiction and the benefits to be paid out in another country with low income tax rates. However, take note, in April and May 2012 HMRC introduced new regulations that had the effect of shifting the jurisdictions in which QROPS could be established. Guernsey and Cyprus got the boot. Since the new regulations came into effect, QROPS are now principally available in Malta, the Isle of Man, Gibraltar and Hong Kong.

Passing on your pension. Another big advantage for QROPS holders and their families is that there is no annuity or alternative secured pension (ASP) purchase required.  The QROPS does away with the ASP requirement. That is also good news for pension holders leaving a QROPS to loved ones. No obligation to buy, no annuity nor ASP means the pension fund does not die when the holder dies. The entire remaining fund can be seamlessly passed on to family members or loved ones.

Going back to the green grass of home?

For those UK citizens who have lived abroad for many years but wish to retire back in the UK, the QROPS is still very attractive. On returning to the UK, a QROPS will be treated the same as any other UK pension scheme which may necessitate changes to the underlying holdings. However, as the rules of jurisdiction where the pension resides differ to UK rules, additional benefits will be available to the holder (compared to a UK scheme), including a greater choice of how much income can be drawn and the ability to avoid death taxes on any growth of the QROPS. A key requirement prior to returning to the UK is to ensure all investments held within the account are UK compliant.

It’s no wonder that QROPS are becoming very popular for British expats and others who have forged careers in the UK.  If you’re planning for retirement and you’re from the UK or have worked there, make sure you consider the fate of your pension plan and the QROPS option.

However, it is very important to keep informed on the latest political developments. In the recent UK budget, the Chancellor of the Exchequer announced that certain types of pension transfers would be blocked in future. Our suggestion is that you review your pension options immediately.