Building a Pension Offshore

Hannah Beecham  Friday, Feb 5 2010 16.06

Offshore with your Pension Pot

We report on the enabling legislation allowing expats to maintain their private pension provision whilst working abroad.

Fanning the flames of your dreams

Two million Brits nearing retirement would like to retire abroad if money were no object, according to research undertaken by international property consultants King Sturge. The survey reveals that one in five over-50s in the UK would prefer to spend the autumn of their years in mellower climes, money permitting.

Our three favourite retirement destinations are Spain, France and Portugal. In a recent survey, NatWest International asked expats to reflect on where in the world they felt healthiest and happiest. Portugal came out top on both counts.

Until very recently, however, many Brits who’d spent a life-time working away from the UK, were hindered from retiring abroad to the country of their dreams by laws barring contributions into UK schemes. Thus, many expats were finding their pension arrangements undermined.

‘A’ Day

On the 6th April 2006 - ‘A’ Day – that all changed thanks to a raft of more enlightened legislation introduced to harmonise the way in which pension contributions are offered tax relief. Working Brits abroad may now transfer their UK pension savings into offshore plans and not risk any financial penalties or tax levies. In general terms, the legislation has expanded choice, giving expats the ability to exercise greater discretion concerning the way in which their funds are invested. Furthermore, subject to certain conditions, expats are now able to withdraw funds from their pension pot after a period of five years without fear of being walloped by a UK tax penalty.

Where are the crocks of gold?

The new legislation demands that expats wanting to transfer their retirement benefits overseas, must invest them in a Qualifying Recognised Overseas Pension Scheme (QROPS). A QROPS is a scheme which, having met certain fundamental safeguards, has been approved by HM Revenue & Customs (HMRC) as a recognised pension arrangement.

It is, therefore, the means by which eligible individuals can legitimately transfer their pension savings outside the UK. QROPS offer three main benefits. First, they are flexible, more of which later. Second, they provide diversity in terms of investment options and, third, they are tax saving vehicles.

The legislation which introduced QROPS, caught product providers on the back foot and it’s taken them some time to catch up with demand by formulating appropriate schemes. However, there are now a number of plans on the market and, crucially, they are officially recognised by the UK’s HMRC, that is to say they are QROPS. (If you are ever offered a scheme that isn’t officially recognised, walk way, it’s not a retirement pot, it’s a can of worms).

A closer inspection of benefits

Once an individual has lived outside of the UK for more than five complete tax years, a QROPS manager is not required to notify HMRC when benefit payments are made because the individual is no longer subject to UK income tax charges. This enables long-term expatriates to receive their pension benefits according to the rules applicable to the country in which the QROPS is established – which is why many expats are looking at Isle of Man and, more recently, Guersney-based QROPS.

It is also possible to reduce inheritance tax through a QROPS. HMRC is extending the protection from inheritance tax charges that QROPS offer with retrospective effect from the 6th April 2006. It’s a complex area, however, and you should ask your financial adviser to brief you if you think you stand to gain.

Individual QROPS may also offer lump sum death benefits if a QROPS-holder dies after age 75. For example, in the Isle of Man, a lump sum death benefit paid to the estate of a QROPS would attract a tax charge of 7.5% compared with the potential 8.2% charge applicable in the UK.

Diversified investments

Depending on the offshore jurisdiction and the individual scheme rules, it may be possible for a QROPS to access a wide range of investments via offshore investment bonds. It may also invest in residential property, which would not currently be permitted in a UK-registered pension scheme. However, a property investment should only be made after an expat has been resident outside the UK for at least five years, otherwise the investment may be taxable by HMRC.

Flexible income

With a QROPS at least 70% of the pension assets must be used to provide the individual member with an income for life. However, with a QROPS you do not have to purchase an annuity, as you would in the UK, nor are you restricted by the minimum income drawdown requirements that apply to some UK pension schemes on reaching age 75.

Peace of mind

So, does a QROPS guarantee the retiring expatriate peace of mind? To begin with, QROPS have to be registered in a country or offshore jurisdiction with a track record of financial probity – that, in itself, offers some considerable peace of mind to expats. The Isle of Man, an offshore finance centre making QROPS something of a speciality, has both depositor protection and compensation schemes in place. What’s more, this is the only offshore jurisdiction which provides private individuals the services of a financial ombudsman to settle their disputes.

If you are on the brink of working overseas, or if you’re already abroad and haven’t yet resolved your retirement planning, you’ll want to talk these matters over with an independent financial adviser (IFA). A good IFA will be able to explain the advantages to be gained from transferring your UK pension into a QROPS. There are three key areas you’ll want explained. How will a QROPS enable consolidation of your pension funds into a single offshore vehicle? How will it enable you to invest your pension funds without incurring tax penalties? How will it enable you to have tax-free access to those funds? Yes, that last point highlights a potentially significant further benefit. Once an expat can prove that they have non-resident tax status, UK pension funds can be transferred into a QROPS without tax deduction and ultimately drawn upon without a UK tax charge being levied, once the initial five-year period of residence abroad is up.

Not yet tried and tested

A word of caution comes from The Fry Group, financial advisers to the expatriate community. QROPS form a relatively new area of expatriate pension planning. Current legislation is unclear as to whether the five complete tax year rule applies to the period of UK non-residence, or the length of time that the funds have been in the QROPS. And until clarification is forthcoming, The Fry Group suggests it would be prudent to leave the funds in the QROPS for five complete tax years and only withdraw monies whilst you are still non-resident.

For the time being, it would be wise to seek sound professional advice prior to drawing down funds from a QROPS. As The Fry Group confirms, “It remains to be seen how the Revenue tackles early withdrawals and whether it will introduce anti-avoidance legislation when it sees that non-residents are taking full lump sums after five years without tax.”