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 consider 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, or more correctly ROPS: What Are They And What Do I Need to Know About Them?
If you’re thinking of moving your pension abroad, whether you’re – living there or are about to move, you’ll hear a lot about ROPS. We mention it a lot, but if you aren’t sure, it stands for “Recognised Overseas Pension Scheme”. These schemes have to comply with the UK tax authorities (HMRC) regulations so that overseas transfers can be made without tax penalties.
ROPS can be used by people who have an occupational or personal pension scheme. We recommend a minimum value of £75,000 for the transfer to be economically viable. You must also be resident abroad, or planning to move abroad, sometime 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 ROPS. For a start, your pension income is no longer taxable in the UK, with its somewhat punishing top 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. You can also potentially avoid the UK lifetime allowance charge of 25- 55% on pensions in excess of £1.03 Million if you transfer your pension to a ROPS before hitting this threshold. All growth after the transfer is not considered for the lifetime allowance charge as the value is tested at the time of the transfer.
The lump sum you can take from a ROPS 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 ROPS is that you can hold your fund in any currency, whereas in the UK you are generally restricted to holding Sterling. There are also more investment options in a QROPS than are available in most UK pension schemes.
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 ROPS, providing that you are not UK tax resident, there will be no such tax to pay on death. So, for those who are thinking about estate planning and who want to minimise their inheritance tax liabilities, a ROPS 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.
Following changes in 2017, you can now only move your pension to a ROPS if you are resident in the European Economic Area (EEA), and intend to stay there at least 5 years, or are moving your pension to a ROPS in the country that you are residing in and will stay for at least 5 years. If you’re resident in a country outside this area or transfer your pension to a ROPS in a country in which you are not living, you’ll have to pay 25% tax.
For people in this latter category we recommend consolidating their pensions into a Self-Invested Personal Pension (SIPP) – see upcoming article.
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.