QROPS: UK Expat Pensioners Still Paying Too Much Tax

According to recent Home Office statistics, 10,000 British pensioners a year wave goodbye to the UK and set off to take retirement abroad. Yet the vast majority of retired expats find that they are still paying tax as they draw their UK pension.

The exception comes when the pensioner resides in a country with a double tax treaty in place, and a clause stating that pension payments are exempt. Unfortunately, if the clause is not there, or indeed if the clause is not worded correctly, tax in the UK is still payable as HMRC class the money as ‘earned’, and therefore subject to standard rules on income.

For those drawing under the nominal £10,000 per year barrier, there is no tax due as personal tax allowance entitlement comes into play, but there are still thousands of British retired expats paying tax into a country they no longer reside in.

The Solution

This problem is nothing new, however since the introduction of Qualifying Recognised Overseas Pension Schemes (QROPS) in 2006, it no longer exists for a growing number of expats.

QROPS allow the transfer of UK-based pension savings to an overseas jurisdiction providing the pension holder no longer lives in the UK – and doesn’t intend to return for five years.

The incentive for transferring into a QROPS doesn’t just lie in the significant potential for a reduction of income tax, there is also more freedom in terms of drawdown, investment choices, and inheritance options.

The majority of QROPS chosen can be in any jurisdiction, not just the one in which the expatriate now resides, however due diligence and consultation with an experienced financial advisor is imperative before any choices are made. Notable exceptions to this rule are both Guernsey and Jersey. The saver must reside here in order to take advantage of one of the number of QROPS available.

Benefits

In terms of tax, QROPS are usually taxed at the marginal rate relevant to the country in which the funds are held. In Gibraltar for example, the rate runs at 2.5% which when compared to the UK’s 20%, puts the benefit into perspective.

Another attractive benefit of QROPS is the flexibility in terms of currency. Often the cash will be transferred in the preferred currency, directly into a local bank. This means there are no delays in receiving the payments, and no exposure to currency fluctuations which could result in loss of income.

Some QROPS offer a 30% tax-free lump sum, and there is no Inheritance Tax against any remaining funds left in the scheme.

Currently there are 42 countries with at least one QROPS option, and there are over 3,400 individual schemes. The popularity of QROPS continues to grow, and in light of the recent Budget 2014 announcements, monthly enquiries across the globe are said to have increased by 33%, according to figures released by deVere Group