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Pension planning for expatriates

By: STEVE RODGERS

[email protected]

Steve Rodgers is International Financial Planning Adviser with Blacktower Financial Management Group.

MANY UK residents moving to Portugal do so at retirement or shortly afterwards, and living in Portugal can offer some distinct pension planning opportunities unavailable to UK residents.

The options available to expatriates include transferring some types of UK pension benefit to the new Qualifying Registered Overseas Pension Schemes (QROPS). However, while these new QROPS may, on the surface, appear to be the answer to all our pension dreams, they are not really suitable for everyone and great care should be taken before jumping in with both feet!

So what are QROPS and what are the alternatives?

QROPS are pension schemes operating in overseas jurisdictions – typically in low taxation territories such as Guernsey, Hong Kong and so on. Her Majesty’s Revenue and Customs (HMRC) permit UK pension rights to be transferred to a QROPS but it must behave in effect as if it were a UK pension scheme for those QROPS members who have been resident in the UK at any time in the previous five tax years.

However, the key attraction of a transfer to a QROPS lies in the fact that once an individual has been non UK resident for at least five tax years, this requirement falls away.

After that time, the pension fund becomes subject to the laws of the relevant overseas jurisdiction – and, for example, the UK requirement to purchase an annuity by age 75 (or be faced with the prospect of a possible 82 per cent tax charge) no longer applies.

The advantages of QROPS over UK pension schemes seem very attractive, especially for people with large pension funds. However, it is worth considering the alternative options very carefully.

HM Revenue and Customs are currently ‘investigating’ QROPs. Although the UK Government introduced these schemes in April 2006, there has been some controversy about them ever since, with calls from some parties asking for QROPS to be scrapped. The controversy has mainly been caused by some QROPS trustees allowing members to take 100 per cent of the pension fund as a single tax free payment.

Uncertainty

Earlier this year, all QROPS based in Singapore had their authorisation suspended and it is widely believed that other jurisdictions are being closely scrutinised.

Therefore there is a great deal of uncertainty surrounding QROPS at present. Even assuming they are allowed to continue in their current guise, the main drawback of QROPS for people with ‘average’ sized pension funds is the cost factor. Of course, the cost of establishing a QROPS will vary with each provider, but a typical scheme will cost a minimum of between 2,000 – 3000 pounds Sterling as an initial set up fee PLUS a similar figure as an annual management fee. Therefore, typical minimum first year costs will be in the region of 5,000 pounds Sterling.  On top of that there will be recurring fess of around 2,500 per annum plus investment management fees and charges.

These charges may seem reasonable for larger pension funds. However, for more modest funds, the costs of such a scheme will generally outweigh the possible advantages. Yes, there are a handful of QROPS available with much lower charges but these schemes invariably have restrictions on the investment choices available and should be considered only with due caution.

So what are the alternatives?

For many expatriates, retaining their pension fund within the UK system can have distinct advantages. Not least is the comfort in knowing that their pension fund is held in a well regulated environment.  

Within the UK system, individuals who have ‘money purchase’ style pensions and haven’t yet taken their benefits have two choices as to how they can draw income.  

Firstly, they can use the remaining fund, after any tax free cash has been taken, to purchase an annuity and generally speaking for funds less than 100,000 pounds Sterling, this may prove the best option. This is because any income is guaranteed throughout lifetime. However, many people do not like the inflexibility of annuities and rates are relatively low at present.  

Secondly, there is Income Withdrawal (Unsecured Pension – USP), where an income is taken directly from the pension fund. Any amount of income can be taken each year up to a generous maximum – about 20 per cent more income than is available from a single life annuity. This flexible income (USP) can continue until age 75, at which stage either an annuity must be purchased or Alternatively Secured Pension (ASP) can be chosen. ASP allows income withdrawal to continue but in a more restricted fashion.

The danger of USP compared to annuity income is that if the investment performance of the fund is poor, it is possible that future income levels will fall.  Conversely, if fund performance is better than required, future income can increase.

A big advantage over annuities is that, on death, the remaining USP fund is available to provide a continuing dependents income or a lump sum cash payment.    

One of the best ways to take income drawdown is to transfer the pension fund to a Self Invested Personal Pension Plan (SIPP).  In many respects these operate in a very similar fashion to QROPS but with lower charges.  There are many ‘low cost’ SIPPs where the charges would typically be less than 500 pounds Sterling in the first year and 300 pounds per annum thereafter – a mere fraction of QROPS charges.

In general terms, until the age of 75 is reached, a SIPP will offer most of the advantages of a QROPS but at a greatly reduced cost. Therefore, it is imperative that you take professional advice and consider all the options available.    

Please contact Steve Rodgers of Blacktower Group for further information. Call 289 355 685 or email [email protected]