Pension scheme transfer outside UK

Question: As we enter the New Year, I have been giving some thought to my future plans, not just for 2010 but well beyond that. I am a British expat and, after more than 10 years working in the Gulf, I have decided that I wish to spend my retirement outside the UK. I have heard that it is possible to transfer my pension scheme out of the UK, so that I can avoid paying tax on it. Can you please advise me on this matter?

Answer: Individuals who have built up UK pensions and then moved abroad, to work or retire, do not need to leave their pensions behind in the UK — there are potentially better alternatives. Changes brought about by A-day (April 6, 2006) by the UK tax authorities have opened up a new range of transfer possibilities for people such as you.

Prior to A-day, pension transfers to non-UK schemes relied on reciprocal Inland Revenue agreements, which generally meant that a UK pension could only transfer overseas if it went into a scheme in the person's new country of residence. After A-day however, UK transfers can now be made to any overseas pension scheme, provided the overseas scheme is registered with Her Majesty's Revenue and Customs (HMRC) as a Qualifying Recognised Overseas Pension Scheme (QROPS).

QROPS are attractive to many people like you who have decided to remain out of the UK for their retirement. The key benefits of such a scheme, compared to a UK personal pension, include the removal of the need to buy an annuity, which under QROPS is replaced by a more flexible drawdown scheme. Plus it allows you to pass on any remaining funds to your family/estate on your death — less only a small taxation of 7.5 per cent.

QROPS also gives you a retirement lump sum which can be up to 30 per cent tax-free, compared with the UK's 25 per cent upper limit. Further tax savings can also be made when the pension comes into payment, and all monies are protected from any future changes to the UK tax system, which in the current economic climate will give you some peace of mind.

Through the scheme you have direct access to thousands of funds, or you can access them via insurance policies. Bank and building society accounts, including fixed-term deposits, can be set up in any currency and you are free to set up share portfolios in UK and international equities, as well as invest in fixed-interest and index-linked securities, OEICs, unit trusts, offshore funds, investment trusts, and property.

However, whilst there are a number of advantages to QROPS, there are also some pitfalls to be wary of. Several jurisdictions around the world have come under the scrutiny of the HMRC, which has resulted in the removal of QROPS approval from some countries.

You must ensure the QROPS scheme you are signing up to has been correctly set up, and adheres to the HMRC's regulations. If the plan encashment or lump sum distributions are in excess of the allowed amounts, the charge levied on your savings by the HMRC can be as high as 85 per cent of the unauthorised amount.

There are a number of firms in the UAE that now specialise in setting up these schemes, including those based in the Isle of Man and in Guernsey. However, this can be a complicated area to deal with, and QROPS are not necessarily suitable for everyone. It would be prudent to seek the services of an independent financial adviser before making a final decision.

The writer is training manager at Nexus Insurance Brokers L.L.C. If you have any questions, please e-mail advice@gulfnews.com