An Expat’s Guide To Pensions
If you’re considering moving abroad during your retirement, there are a range of financial options to consider. These allow you to retain as much or little control over your pension and associated investments as you like. In some instances, it can prove highly beneficial to switch your pension so that it is based outside of the UK, whether that’s in your new country of residence or another location. QROPS are an excellent example of this. Our expat’s guide to pensions will explain how this form of pension can be used to best effect, as well as a SIPP.
Expat’s Guide To Pensions: QROPS
As the name suggests, a Qualifying Recognised Overseas Pension Scheme (QROPS) can only be used by those based outside the UK, expats. You are able to transfer your assets into a QROPS from a UK registered pension scheme because it has been deemed to have met a number of conditions laid out by Her Majesty’ Revenue and Customs (HMRC). These stipulations are necessary for the government to ascertain whether your QROPS meets the same standards of a UK pension. We recommend speaking to a financial advisor, such as Mathstone, to ascertain that your QROPS is correctly configured to meet the requirements.
Please be aware that not every form of pension can be transferred into a QROPS. These include the standard UK state Pension as well as public sector and civil service pensions.
But why would you choose to use a QROPS? Because of the flexibility and control it offers. For example, you can live in a completely different country to that in which your QROPS is based. Such flexibility allows to you to make the most of favourable currency exchanges without limiting your choice of where to live and enjoy your retirement.
You can choose to maximise the potential of your pension by basing it in locations like Isle of Man, Jersey, Malta or Gibraltar. Their more transparent tax systems ensure that they’re easily understood with the aid of a financial advisor. Furthermore, the quality of their banking infrastructure and the approval of internationally trusted regulators should reassure you that your pension is safe and secure.
The tax advantages of a QROPS are a major selling point. Once you turn 55 and become eligible to access your QROPS, you have the option to access a 30% tax-free lump sum. You might see this referred to as a PCLS or Pension Commencement Lump Sum.
From an income tax perspective, high earners can expect to benefit immensely from the reduced income tax obligation. Whilst you must continue to pay up to 45% for the first 5 years, you then pay no UK income tax from that point onwards. Please note, that you will be required to pay income tax either in your country of residence or the country in which the QROPS is based (these may not be the same), depending on the terms of any double taxation agreement. However, careful consideration and planning can ensure that you still pay less income tax than you would with a UK based pension.
Similarly, using a QROPS means that you don’t have to pay UK inheritance tax but you might still need to pay the inheritance tax of your new country of residence, or that of the QROPS.
Expat’s Guide To Pensions: SIPP
The key difference between a SIPP and a QROPS is that the former is still based in the UK, and so is used by expats and residents alike. SIPP stands for Self-Invested Personal Pension.
The purpose of a SIPP is to increase your level of control over your pension. It removes the middle man and puts you firmly in charge of deciding how your assets are invested, potentially with the input of a financial advisor. Rather than spending your valuable pension on paying excessive management fees, you can choose to spend as and how you like.
An additional benefit of a SIPP is the ability to consolidate multiple pensions into one scheme. This can prove particularly advantageous to individuals who have worked at multiple companies over the course of their career.
From a tax standpoint, a SIPP is eligible for the UK’s 20% basic rate tax relief on the first £40,000 placed in the scheme annually. You also have the ability to withdraw 25% of the pension tax-free.
Hopefully, you’ve found our expat’s guide to pensions useful. If you are interested in discussing a QROPS or SIPPs in more detail, or are seeking independent financial advice on your investment choices, please do get in touch. Please note that some of the information on this page is only applicable to UK residents.