What to do with your frozen UK pension plan
Gulf News gives a rundown on how British expatriates can plan for their retirement under an overseas scheme
Dubai : There are many British expatriates living and working in the Gulf.
In addition there are many expatriates of other nationalities who have spent time working in Britain before coming here.
For those who have worked in the UK and contributed to a pension fund at any time, understanding the UK's Qualifying Recognised Overseas Pension Scheme (QROPS) is an essential part of effective retirement planning.
Could some of the millions left in frozen UK personal pension plans be yours? And if so, what are you entitled to do with that money?
What is QROPS?
The British QROPS allows individuals to transfer their UK accrued pension into another jurisdiction when they retire abroad.
UK pensions have traditionally been frozen when the holder retires overseas with no access to their money. This changed in April 2006, which is known as A-Day, when HM Revenue and Customs (HMRC) changed regulations surrounding pensions enabling holders to transfer their substantial funds to another country when they retire to a different jurisdiction.
By transferring your pension into a QROPS, you have immediate access to your money when you retire and you will also be able to receive a tax-free lump sum. More importantly for many is the empowerment to pass on your pension funds to your loved ones, upon death.
A qualified QROPS must be legally recognised by HMRC and must meet the following criteria:
- It must be recognised by HMRC for tax purposes therefore, it must be open to residents of the country where it is based where there are stable taxation laws in place
- The maximum lump sum should not exceed 30 per cent and 70 per cent left to provide an income
- To draw your income you must be at least age 55
Benefits of transferring your pension in to QROPS programme
If you transfer your UK pension into a QROPS based in another jurisdiction and you plan to retire abroad permanently, the benefits offered could make a substantial difference to the comfort of your retirement.
The major advantages of transferring your pension into a QROPS include:
- Greater freedom to invest in a wide range of funds and asset classes
- Ability to pass on pension funds to your beneficiaries upon your death
- Tax efficiencies and planning opportunities
- Up to 30 per cent of the fund as a lump sum draw-down. This varies from location to location, in some domiciles you move the funds to, you will be able to free even more of the money.
- Currency flexibility
For your pension payments to become more tax efficient, or even tax-free, it most often makes more sense to transfer the funds into a QROPS scheme in a neutral location, for example Guernsey.
When choosing to transfer your pension into a QROPS fund in other countries, you should always weigh up the political and currency risks that will affect the value of your funds in the future.
Relocating your pension to a neutral and safeguarded domicile, rather than your current location, removes the risks associated with volatile currencies, political agenda, or perceived monetary risks within the economy.
Could it benefit me more leaving my pension in the UK?
If you leave your pension in the UK you will be subject to paying income tax at the highest marginal rate, tax of 35 per cent on death, and a further 40 per cent inheritance tax. After the age of 77 the cumulative death taxes could amount to 82 per cent.
There are greater benefits available to you if you transfer your pension to another jurisdiction. If left in the UK, your pension could potentially face:
- The application of the tax rates referred to above. This applies even if you are outside the UK when you reach retirement age or have retired
- The inability to pass on the remainder of your pension to your beneficiaries, including your spouse and children, upon your death
- Minimal investment flexibility and choice
- Below average growth in your pension fund
There are few disadvantages of the QROPS scheme. It may not be for you if:
- Your pension pot is small and therefore the charges incurred in moving the funds will outweigh the benefits. An adviser will investigate what you have in place for you, for free.
- You are not willing to actively manage the funds once you have moved them, or work with an adviser to do so.
- You are going back to the UK within the next five years.
It is possible to transfer your pension back again within another programme, called QNUPS, but switching funds backwards and forwards in a short term is a diseconomy.
Effective planning for your retirement can make the difference between being just able to live and living comfortably. If you have a meaningful UK pension and are planning to retire abroad it makes sense to get sound financial advice from QROPS pensions experts.
For more information about how to transfer your UK pension to a QROPS scheme, you should talk to a professional financial consultant.
Identify an adviser with strong partnerships with the leading international investment houses and insurance companies to ensure access of which offer some of the most competitive products in the marketplace and a high level of protection. Your adviser should be able to investigate the funds that you have in the UK on your behalf, for free.
Are you eligible for a pension transfer?
To be able to transfer your UK accrued pension to a QROPS scheme in another jurisdiction you must be between the ages of 18 and 75 and have a substantial pension of at least £50,000 (Dh293,609) to transfer. You must also be planning to be overseas permanently or living in the country you have retired to for five years or more.
HMRC rules state that changes to the QROPS scheme must be reported in the first five full tax years of the transfer. Similarly if you return back to the UK within five years it must be reported otherwise you will face heavy tax penalties. After five years reporting restrictions do not apply and so you will become free to relocate your fund around QROPS Guide
All QROPS schemes must be legally recognised by HMRC in the jurisdiction that you transfer your pension to. A full list of recognised QROPS schemes can be found on: http://www.hmrc.gov.uk/ PENSIONSCHEMES/qrops.pdf
The writer is Director at P.I.C de Vere in Dubai.
