QROPS: The pros and cons of transferring your UK pension

One of many pension options available to British expatriates today is transferring to a Qualifying Recognised Overseas Pension Scheme (QROPS).

QROPS are foreign pension schemes recognised by HM Revenue & Customs (HMRC) to receive tax-free transfers from UK-registered pension funds. They were introduced in 2006 to help British expatriates simplify their financial affairs.

Despite being widely seen as the answer for expatriate retirees, QROPS are by no means a one-size-fits-all solution. Here we consider some of the key advantages and disadvantages.

Tax efficiency

Currently, Portugal residents can transfer UK pensions into a QROPS tax-free, so long as the QROPS is based within the EU/EEA. However, other transfers could trigger a 25% UK tax penalty or even 55% if not structured correctly, so take extreme care.

Once in a QROPS, funds are sheltered from UK taxes on income and gains and no longer count towards your lifetime pension allowance (LTA), so can grow unlimited without 25% or 55% LTA penalties.

QROPS funds only become taxable once you start taking benefits in your country of residence.

However, Britons resident in Portugal can enjoy tax advantages on UK pensions without needing to transfer. Through the UK-Portugal double tax agreement, UK state, personal and non-government service pensions are taxable solely in Portugal. For non-habitual residents (NHR), this can mean tax-free UK pension income for the first ten years.

For expatriates without NHR status, UK pension income is taxable at the progressive Portuguese income tax rates up to 48% – but it is possible to receive up to 85% tax-free under certain conditions.

Flexible access

While UK pensions can be restrictive, many QROPS let you take as much cash or income as you like, however and whenever you want. You could, for example, draw a higher income in early retirement and reduce it in later years, or take a lump sum and preserve the rest for a rainy day or future generations.

However, with this freedom comes more potential to exhaust your funds – unlike a UK annuity or ‘final salary’ pension which provide a guaranteed income for life.

Diversification and investment choice

QROPS usually offer more options than UK pensions for how to invest your money, and are not as over-exposed to UK assets. You can choose a flexible investment plan across a wide range of funds to suit your circumstances, objectives, timeline and risk appetite.

As the value of any investment can go down as well as up, this introduces an element of risk to your retirement funds that is absent from a guaranteed annuity. However, an active, well-diversified investment approach can manage and minimise risk.

Estate planning flexibility

Most UK pensions are only payable to your spouse on death, but QROPS enable you to include other heirs. So rather than dying with you or your spouse, your pension wealth could pass to any named beneficiary, even across generations.

Multi-currency options

While UK pensions only pay out in Sterling, some QROPS allow you to invest funds and make withdrawals in more than one currency. This is a major advantage for British expatriates as it reduces dependence on Pound/Euro exchange rates and removes currency conversion costs.

Freedom from UK rules…to a point

As funds in a QROPS are no longer governed by UK pension legislation, they are protected from future changes to UK rules. However, you could still be subject to UK legislation – and taxation – if you transfer again to an unapproved scheme within five tax years (for funds transferred after March 8, 2017), or if you permanently return to the UK within 10 years.

Note also that the goalposts for QROPS are highly likely to shift in the future. Since their inception in 2006, HMRC has made numerous revisions to the rules and delisted thousands of QROPS from various jurisdictions. As a result, currently there are no Portuguese schemes on the HMRC list of approved QROPS, so expatriates resident here need to take care to choose an eligible scheme in another EU/EEA country – like Malta – to avoid transfer penalties.

Where HMRC deems that its rules have been broken, it can charge a 55% penalty on the transfer amount – potentially even if you had moved funds before the rules changed.

Regulated, tailored advice is crucial

Overseas pension transfers are complex – and a key target for pension scams – so regulated advice is essential. Take care to explore your full range of options to establish the most suitable solution for your particular circumstances. If you decide to transfer, you will need specialist guidance to find a suitable product, navigate the cross-border tax and jurisdiction issues, and ultimately secure your long-term financial security in this ever-changing pensions landscape.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.

By Adrian Hook
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Adrian Hook is a Partner of Blevins Franks and has been providing holistic financial planning advice to UK nationals in the Algarve since 2007. Adrian is professionally qualified, holding the Diploma for Financial Advisers.