Should you transfer UK pensions overseas? The pros and cons of QROPS

One of the many pension options for British nationals living in Portugal is transferring to a Qualifying Recognised Overseas Pension Scheme (QROPS), but this is by no means a one-size-fits-all solution.

What is a QROPS?
QROPS is a label for foreign pension schemes that meet HM Revenue & Customs (HMRC) rules to receive transfers from UK-registered pension funds. This enables retiree expatriates to simplify their affairs by taking their pensions with them.

Currently, Portuguese residents can transfer UK pensions into an EU/EEA-based QROPS tax -free, but transfers outside the bloc trigger a 25% UK ‘overseas transfer charge’. As there are no approved Portuguese schemes, you need to take care to choose a suitable scheme in another EU/EEA country to avoid penalties. Beware, however, that time may be limited to avoid this charge altogether, as many expect HMRC will start capturing EU/EEA schemes after the Brexit transition period ends.

Once in a QROPS, funds are sheltered from UK taxes on income and gains and stop counting towards your lifetime pension allowance (LTA). Although those already over the limit pay 25% on the excess when transferring, funds become immune from further LTA penalties.

Otherwise, QROPS funds only become taxable once you start taking benefits in Portugal.

Tax considerations
Portuguese residents accessing QROPS (or UK pension income) face progressive income tax rates from 14.5% to 48%. If you hold non-habitual residence (NHR), QROPS/UK pensions are instead taxed at a flat rate of 10% for your first decade here. Those who qualified for NHR before the rules changed in April 2020 can continue receiving tax-free QROPS and foreign pension income for the remainder of the ten10-year NHR period.

If you do not have NHR status (or your term has expired), you could find alternative tax-efficient options for reinvesting pension funds as a Portugal resident, so take care to explore your options.

Flexible access
While UK pensions can be restrictive, many QROPS allow you to 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 when you are most active, then reduce it later. Or you could take a lump sum and preserve the rest for a rainy day or for your heirs.

However, this freedom also brings 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 your money is invested and are not as over-exposed to UK assets. You can choose a flexible investment plan across a 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
While most UK pensions are only payable to your spouse on death, QROPS offers the option to include other heirs. So rather than ending with you or your spouse, your pension wealth could pass to any named beneficiary, even across generations.

QROPS may also offer some protection from UK inheritance tax when passing pension assets to non-UK resident heirs.

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 in Portugal as it removes currency conversion costs and reduces dependence on pound/euro exchange rates.

Freedom from UK rules
Funds in a QROPS are no longer governed by UK legislation, so are generally protected from future changes to UK rules. Beware, however, that you could still be subject to UK legislation – and taxation – if you move outside the EEA within five UK tax years of the transfer date. Technically, this would also apply if you permanently return to the UK within five years, as the UK will be a non-EU/EEA state from 2021, but these rules are likely to be reviewed post-Brexit.

Where the payment falls within the unauthorised payment rules, tax penalties of up to 55% on the transfer value can apply – potentially even if you moved funds before the rules changed.

Regulated, tailored advice
Overseas pension transfers are complex – and a key target for pension scams – so do not underestimate the value of regulated advice. Take care to explore your full range of options to establish the most suitable solution for your particular circumstances. If you decide to transfer, act soon, before the rules potentially change post-Brexit. In any case, you will need specialist guidance to find a suitable product, navigate the cross-border tax 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; individuals should seek personalised advice.

By Dan Henderson
|| features@algarveresident.com

Dan Henderson is a Partner of Blevins Franks in Portugal. A highly experienced financial adviser, he holds the Diploma in Financial Planning and advanced qualifications in pensions and investment planning from the Chartered Insurance Institute (CII). | www.blevinsfranks.com