What are the benefits of transferring to your pensions fund to a QROPS?
The benefits of transferring your UK pension fund into a QROPS vary according to the scheme itself and the tax regime of the country which hosts it. However, common benefits include the following:
Income Tax treatment
QROPS were introduced in 2006 as part of the government’s Pension Simplification initiative. Before that, anyone with a UK pension who wanted to retire abroad had to pay UK tax of 25% when they withdrew the funds. Accordingly, the member’s pension pot could be significantly reduced before they even started their retirement.
The QROPS system enables members of UK registered schemes to transfer their pension funds to foreign schemes that have been authorised by the HMRC. The fund is then dealt with under the pension tax regime of the hosting country, so no UK income tax is payable. But investors should be aware that tax may be payable under the host country’s tax system. If the investor lives in a separate country from the hosting country, further tax may be payable under that regime. However, these are factors that QROPS advisers take into account when choosing an appropriate scheme on your behalf, and it is often possible for the scheme member to receive their pension tax free.
A regular UK pension is liable to inheritance tax on the death of the member. The exact amounts depend on the age the member reached, and what stage of the pension they had already enjoyed (for example, lump sum or annuity).
When a QROPS member dies, not only can the residue of a QROPS be left to the deceased member’s family, in some circumstances it will be free from inheritance tax.
Better flexibility regarding investment decisions
UK pension scheme members are growing used to having control over their pension investments, as SIPPs (self invested personal pensions) are becoming more popular. However, some foreign jurisdictions are well versed in giving investors even greater freedom under their pension regimes. So if you transfer you fund into a QROPS, you may find that you have more control over investment decisions than ever before. Of course, this depends on the particular details of the scheme you choose, and the country hosting it.
Ranges of benefits
Whether you need flexibility about investment decisions or not, QROPS offer considerable choice about how to enjoy your pension fund. The UK pension rules oblige members to purchase annuity at the age of 75, or make alternative arrangements. The rules of some QROPS can be more flexible. Some allow you to delay taking an income beyond the age of 75, if that is what you would prefer.
The UK system also controls when members can take lump sums, whereas other jurisdictions can be more relaxed about this issue.
Exchange rate crystallisation
Most UK pensions pay their benefits in sterling. So if you are planning to retire abroad and take your income from your UK fund, not only will you have to pay UK tax on the income, but you will also have to run the risk of exchange rate fluctuations devaluing the amount.
QROPS are normally held in the currency of the country in which they are based, so the member no longer bears the risk of currency fluctuations. The member must, however take advice about when to transfer the fund, and whether it is a good moment from the point of view of exchange rates at that moment.
Other issues to bear in mind
While there are clearly many benefits to transferring your fund into a QROPS, there are some other issues to bear in mind.
The charges levied by QROPS providers can vary enormously, but should be factored in when you are calculating your retirement income. A large QROPS adviser may be able to negotiate a good deal.
Another issue to consider is whether you will lose any benefits as a result of transferring your pension across. There may be disadvantages for those with defined benefits schemes (for example, final salary pensions). Again, a good QROPS adviser can assess an individual’s pension and give information about how it will be affected.
Finally, you need to consider whether you will ever return back to the UK. Early retirement can be an active time, when members enjoy relatively good health. However, members may wish to return back to the UK if their health declines, or even just to change their lifestyle. This situation has to be carefully planned, as their transfer out of a QROPS and return to the UK can trigger tax liabilities in some scenarios.