One of the best pieces of advice that anyone ever gave about retirement was that it’s always best to retire to something rather than from something. In other words, retirement is just the next interesting stage of life. This is particularly true for people who intend to move abroad to enjoy retirement to the full.
There’s a lot to think about in terms of how and when to transfer a pension abroad. This is also a concern for people who are some way off retirement but planning for the future and who need to make the best possible provision. People’s personal and financial circumstances vary hugely and the decision is also highly dependent on where you want to move to.
An expert adviser will take into account your age, how long it is until you want to retire, the way that your pension is made up and what financial needs you are going to have in retirement.
QROPS: What Is It and Why Do I Need to Know About It?
If you’re thinking of moving your pension abroad, whether you’re already living there or are about to move, you’ll hear a lot about QROPS. We mention it a lot, but if you aren’t sure, it stands for “Qualifying Recognised Overseas Pension Scheme”. The word “qualifying” is important. It means that the UK tax authorities (HMRC) have recognised the scheme as meeting their requirements for a valid pension investment. This is vital if you’re not going to encounter tax problems when you transfer your pension abroad.
The QROPS scheme applies to people who have an occupational or personal pension scheme with at least £50,000 invested in it. You must also be resident abroad, or planning to move abroad, some time during the next 12 months. An adviser who is knowledgeable and experienced in this area will be able to show you how you can avoid the limitations of the UK pension system and get the most growth or income from your pension.
Are There Benefits If I Transfer My Pension Abroad?
There are a number of benefits to transferring your pension into a QROPS abroad. For a start, your pension income is no longer taxable in the UK, with its somewhat punishing top rate of 45% tax on pension income. In fact, depending on where you decide to live, you may be able to pay no tax at all on your pension. And whereas the UK has a lifetime allowance of £1m, there is no such limit when you transfer to QROPS overseas.
The lump sum you can take is higher as well. This is very often 30%, whereas in most circumstances you can only take a maximum of 25% in the UK. You must have been officially non-resident in the UK for over 5 years to take advantage of this.
Another advantage of a QROPS is that you can hold your fund in any currency, whereas in the UK you are restricted to holding sterling. There are also more investment options in a QROPS than are available in a UK pension scheme.
And lastly, if you’re over 75 and you die as a UK resident, the people to whom you leave your estate will have to pay tax at their applicable rate. In a QROPS, you have no taxes at all, and the age at which you die is not relevant. So for those who are thinking about estate planning and who want to minimise their inheritance tax liabilities, a QROPS can potentially be a very strong option.
Move First, or Move Your Pension First?
As always, with major financial decisions, timing is important. If you have a spouse, you both need to look at the timing and the options available to make sure that you reduce your tax bill and maximise the impact from your pension.
In an uncharacteristic fit of bonhomie, the Chancellor has announced that if you are resident in a country inside the European Economic Area (EEA), you can transfer your pension into a QROPS tax-free. If you’re resident in a country outside this area but transfer your pension to a QROPS inside the area, you’ll have to pay 25% tax initially. This is refundable if you move back into the EEA within five years, but because of the tax, your adviser may be able to recommend a more suitable investment option in this scenario.
And finally, if you transfer your pension into a QROPS outside the EEA, there’s no tax provided that you are resident, or are about to be, in that country.
This is a simple summary. In fact, there are many more complications, opportunities and choices. It’s worth remembering that this is a specialised advice area. As a result, you would be well advised to talk to a competent adviser who has up-to-date knowledge of the current situation, understands your finances and what you want to do and can give expert advice as to what’s best for you.
To throw a final spanner in your thinking, Brexit may produce some surprises that further complicate the decisions you make and the options available to you in years to come. So whilst you may not ultimately decide to move your pension right away, it is definitely a good idea to conduct your research and seek expert advice early on, to future-proof that precious pension.