The most feasible way of transferring a UK pension overseas is a QROPS.
If you want to transfer your UK pension to an overseas scheme, your only option is a Qualifying Recognised Overseas Pension Scheme (QROPS). Before you make that transfer though, you need to understand what a QROPS is, how it works, whether you are eligible and whether the transfer is in your interests.
What is a QROPS?
As the name suggests, a QROPS is an overseas pension scheme that is recognised by Her Majesty’s Revenue and Customs (HMRC) as qualifying as a legitimate scheme to transfer funds into. The two conditions an overseas scheme has to meet to become a QROPS is that:
1/ the scheme has to be a recognised overseas pension scheme and;
2/ the scheme has to report certain information to and pay tax to HM Revenue and Customs (HMRC).
If the overseas pension scheme that you attempt to transfer your UK pension into is not a QROPS, i.e. not recognised as qualifying, then your current UK based scheme provider may refuse to release the funds or alternatively, HMRC will view the transfer as illegitimate and you can expect to be taxed extremely heavily (40% or more).
Of course, if the scheme is a QROPS then there are many pros to making such a transfer but beware, as there are also points to be aware of.
QROPS today, not tomorrow
Imagine you have sourced an overseas pension scheme that you want to transfer your UK pension into, perhaps with the expert help and guidance of bdhSterling. You need to know that the scheme is a QROPS. The UK government publishes and regularly updates a list of Recognised Overseas Pension Schemes This list is updated, by HMRC, on the 1st and 15th of every month and provides an indication of schemes that are recognised to receive UK pension transfers. However, just because a scheme is on the QROPS list, HMRC cannot guarantee that the scheme is a ROPS or that any transfers to the scheme will be free of UK tax. It’s your responsibility to find out if you have to pay tax on any transfer of pension savings.
Conversely, a scheme that is a QROPS may elect to not be placed on HMRC’s published list.
You can avoid the potential misfortune of ensuring that your QROPS is qualifying as a QROPS by having your overseas pension affairs managed by an experienced and reputable firm such as bdhSterling.
Do you qualify?
Many overseas pension schemes are not QROPS. However, even if you find one that is, there are other criteria that you have to meet in order to be eligible. You need to know if you qualify for a QROPS.
1. Age can be a factor
QROPS in some overseas jurisdictions have a minimum age requirement before a transfer to the scheme can occur. For example, to transfer to an Australian QROPS, the member has to be aged 55 or over.
2. Your UK pension is a factor
If you have not purchased an annuity or received any payments (final salary schemes) from your current UK pension scheme, you may be eligible for a QROPS transfer depending on other factors. However, you cannot transfer to a QROPS if you have already purchased an annuity or received any income payments from your current UK defined benefit pension scheme.
3. State pension?
You cannot transfer funds from your state pension into a QROPS.
Is the QROPS transfer worthwhile?
If we assume that you have identified a genuine QROPS and are eligible to transfer your UK pension into that QROPS, then what next? Just because you are eligible for the QROPS does not necessarily mean that transferring into a QROPS is the right option for you, nor does it necessarily mean that the QROPS you are looking at it the best one for you.
1. Do you have a large enough pot?
By transferring your funds to a QROPS, you could potentially benefit from a significant reduction in the amount of tax that you pay in retirement. This would, of course, depend on your tax position in the UK and in your new country of residence.
Remember, transferring into a QROPS is not something you can do lightly as there can be significant setup and running costs compared to your UK pension. If you do not have a large enough pot, it may not be worth your while. How much is enough depends on a number of factors and it is better to seek up-to-date advice from an expert at the time you are considering your options.
2. Is your pension pot particularly large?
As a consideration, the greater the amount of funds you are transferring into a QROPS the better. The larger your pot, the greater the potential saving in tax. Also, if the scheme charges on a flat fee basis, the larger funds can absorb these fees better.
Remember, there is a Lifetime Allowance (LTA) ‘test’ in UK pension legislation, on transfers to QROPS. This is known as Benefit Crystallisation Event number 8 (BCE8). If the value of your UK pension funds are above the LTA when transferred to QROPS, there will be a tax charge on the excess.
3. Will you have to pay a transfer tax?
You may not have to pay the Overseas Transfer Charge (OTC) or transfer tax or, if you do, the size of the transfer may be such that it is still worth your while. You may be exempt from the charge if you are transferring funds from a UK pension to a QROPS that is established in another European Economic Area (EEA) country, or if you are an employee of an employer that is participating in an overseas public service pension scheme for example.
However, ensure that you receive the correct advice and do not overlook the potential of an OTC, as your transfer could be hit with an unexpected tax of 25%.
4. What are the specific benefits of the QROPS you are transferring to?
In many cases, transferring to a QROPS could bring excellent income, lump sum death or tax benefits, especially if you receive expert guidance on the matter. The QROPS that you decide upon will depend on the country you are wanting to transfer to, when you are going to want to have access to your pension funds and what types of benefits you would like to receive in retirement.
It is worth noting that transferring to a QROPS could prove costly if the tax implications in the country or jurisdiction you have moved to are particularly high. Some investment options are more risky than others and whereas greater risk usually includes the possibility of greater rewards, the flip-side is the risk of a greater loss.
If you are looking to emigrate or have already emigrated to Australia then the type of QROPS you will be considering will be an SMSF. As the name suggests, these are self-managed funds meaning the members of the fund, i.e. you, are responsible for how the money in the pot is handled, how it is invested, etc.
Being responsible for your own funds means more control and with SMSF options, such as the possibility of borrowing against the pot for a mortgage on a property that you are not intending to live in, can be an exciting prospect.
Deciding how to manage your SMSF is a massive responsibility and not one to be taken lightly. It is very easy to get it wrong and lose out (especially if you do not seek the right advice or guidance). You should be aware that there will always be a risk.
An article such as this can never be a substitute for specific, tailor-made advice based on your circumstances. What it does show is there are a range of considerations when transferring a UK pension into a QROPS which relate to eligibility, pension fund size, to where the QROPS is based and the type of QROPS being transferred to.
If you are considering a QROPS transfer, get in touch with our consultants today for expert guidance.