Pensions

Pinning down your pension

One of the main considerations if you move abroad is the tax treatment of your pension. If you have spent time and money contributing to a UK pension scheme you will want to ensure your hard-earned contributions continue to mature in preparation for retirement. The logical step would be to move your pension to an overseas scheme in the country where you take up residence, but until now this has been virtually impossible for a number of reasons – not least that basic rate tax, which currently stands at 22%, is applied by the UK Government in order to ‘claw back’ the tax relief it had already provided when contributions were placed in the pension fund.

The net result of this is that you would have faced having to consolidate your pensions, resulting in charges and a raft of administration, or leave your entitlements frozen. ‘A’ Day, on 6th April 2006, heralded a host of new regulations for pensions. The aim of the exercise was to harmonise the way in which pension contributions are tax-relieved, and a useful byproduct of the legislation was the ability for British expatriates to move their UK pension plan into an overseas scheme without a tax levy.

In addition, expatriates now also have the ability to wield more discretion over how those funds are invested, and (subject to certain conditions) can withdraw the funds without UK tax penalty after a period of five years.

Until recently, there were virtually no schemes that could be used, effectively making the legislation redundant. However, a number of appropriate schemes have now been introduced which, more importantly, are officially recognised by the UK taxman. The schemes have a collective name of Qualifying Recognised Overseas Pension Scheme or QROPS. This brings with it some peace of mind – QROPS have to be registered in a country with a regime of pension taxation or must allocate a substantial percentage of the funds transferred to providing an income for life for the investor.

The advantage of transferring a UK pension into a QROPS is clear. If you are non-resident in the UK for at least five complete tax years (or know that you will be) your UK pension funds can be transferred without tax deduction and ultimately drawn without UK tax consequence once the five year period is up. As this is a relatively new area of expatriate pension planning it follows that a certain level of caution should be exercised. Current legislation is not clear on whether the ‘five complete tax years rule’ applies to the period of UK non-residence, or the length of time that the funds have been in the QROPS. Therefore, until clarification is issued, it seems prudent to leave the funds in the QROPS for five whole tax years and then withdraw whilst non-resident.

Furthermore, 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. Good quality personal advice is vital when planning for retirement, so it is important to talk through your individual circumstances with an expert. The benefits of using a QROPS is that it neatly provides an opportunity to consolidate pension rights, invest in a single offshore vehicle without tax penalties and, crucially, have tax-free access to those funds.

How it works A 58 year old airline pilot, married with a young family. He left the UK for income tax purposes in 2000 and lives in Singapore. He owns a property in France to which he will retire in the future. His likely full retirement is between 60 and 65 years of age. He currently has a pension which provides him with £144,451.21 gross pension income a year. He has an agreement (although a double taxation agreement attempt failed) between HMRC and Inland Revenue Authority of Singapore to pay 20% tax or £28,890.24. Therefore, his net pension income is £115, 560.97 By moving him to a QROPS vehicle, as there is no recognition of overseas pension income, or any foreign income in Singapore (taxed on income arising in Singapore on an earned income basis only), the income he will receive without tax being deducted at source will be £146,542.45.

This means he will make a saving, or gain, of £30,981.48 each year.With several other changes made to crystallise gains in his funds and reinvested into a professionally managed discretionary portfolio, he will receive a 26% increase in his net income.

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