UK keeps tight rein on pension transfers

Latest efforts from the UK government to tighten the rules for pension transfers should have little impact on Britons living abroad.

Expatriates still have the right to move UK pension funds into an approved Qualified Recognised Overseas Pension Scheme (QROPS) without paying UK taxes or penalties. Currently, no UK charges apply for EU/EEA residents transferring to an eligible QROPS within the bloc, or for non-EU/EEA residents transferring to a QROPS based in their country of residence. However, HM Revenue and Customs (HMRC) impose an ‘overseas tax charge’ of 25% for unapproved QROPS, or penalties of at least 40% on transfers to other unregistered schemes.

Why does the UK regulate transfers?

By ‘policing’ transfers, the government aims to protect Britons from pension scams and inappropriate investments. An alarming number of cases have seen people lose some or all of their retirement savings as the result of deliberate fraud or by reinvesting in failed, unregulated investments.

The government estimates that pension scammers claimed £5 million in the first five months of 2017, totalling £43 million since April 2014. While funds in a UK authorised pension scheme offer some compensation if things go wrong, if they are transferred into an unregulated structure there is no protection.

To make sure foreign pension schemes meet their strict standards, the government maintains a public list of approved QROPS. To make the list – and stay there – QROPS must behave in a similar way to UK schemes.

Any scheme, for example, that allows savers to access pension funds before the UK minimum age of 55 (outside exceptional circumstances) is not approved. Anyone moving UK funds to such a scheme would face penalties as a result.

Ever decreasing options

The government’s rules and list of approved QROPS are regularly reviewed. After major rule changes this April, 30% of schemes – over 400 – were taken off the list for failing to meet the requirements, and nine countries no longer had an approved QROPS option.

For example, currently there are no Portuguese, French or Cypriot QROPS on the list. That means expatriates in Portugal wishing to transfer must select an eligible scheme in a third country. Transfer penalties can be avoided by choosing an approved QROPS within another EEA jurisdiction, such as Malta or Gibraltar.

Note that UK funds transferred after March 8, 2017 remain liable to the overseas tax charge for five UK tax years. This means you could still be taxed 25% if you move funds again (an ‘onward transfer’) to an unapproved scheme or you become non-EEA resident within this period.

Brexit may further limit opportunities

Another incentive for the UK government to tighten control over pension transfers is increasing revenue from Britons abroad. HMRC’s benefits here are twofold – keeping funds within the UK so that, wherever possible, pension income and withdrawals can be taxed, and collecting penalties from those who transfer overseas.

Currently, UK pension contributions and growth both benefit from tax relief in Britain, and can potentially be accessed by expatriates without paying UK tax (under double tax agreements). While this is unlikely to change with Brexit, HMRC may want to keep more funds within their reach by stemming the flow of UK pensions abroad.

While Britain is in the EU, the government is committed to freedom of movement – including capital – across the bloc. After Brexit, however, fewer restrictions mean there is more flexibility to claim taxes from expatriates’ EU pension transfers.

Why consider transferring?

Many expatriates choose to transfer to a QROPS to unlock significant tax advantages and flexibility over UK pensions.

Once in a QROPS, your funds are sheltered from future changes to UK pension rules and British taxation on income and gains. Funds will no longer count towards your lifetime pension allowance (LTA), enabling unlimited growth without attracting the 55% or 25% LTA tax penalties.

You can combine several UK pensions under one tax-efficient QROPS umbrella, with more flexibility and control over how you invest and access your pension funds. This can include currency flexibility, enabling you to reduce exchange risk by taking income in Euros without having to convert it from Sterling.

QROPS also offer estate planning advantages. While many UK pensions are payable only to your spouse on death, QROPS offer flexibility to include other heirs and roll across generations.

However, transferring a UK pension is not suitable for everyone and differences between QROPS providers and jurisdictions could affect tax benefits. It is essential to consider all your options and take regulated pensions advice to protect your retirement savings and establish the best approach for you. If you decide to take action, consider doing so now – under current rules and before Brexit – to make the most of today’s opportunities.

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.