Brits retiring abroad and switching their pensions to an offshore scheme need to watch out for a tax trap that could lead to a massive bill.
Offshore pensions – called qualifying recognised overseas pensions schemes (QROPS) – are popular with Brits retiring abroad.
This article only touches lightly on QROPS, to find out more about this complex "thing" follow this link to another QROPS article
The offshore pension allows an investor to switch any transferable UK pension funds in to a pension in another country and many have investment options that are more flexible and tax efficient than those offered by UK pensions.
The five-year rule
After five tax years, the pension investor is considered non-resident in the UK, so the pension provider has no obligation to report cash withdrawals from the scheme to HM Revenue and Customs (HMRC).
In the first five tax years, if the investor makes ‘unauthorised withdrawals’, they are subject to a tax charge of up to 55% of the withdrawal – consisting of a 40% tax charge and a further 15% penalty.
The pension investor has to report any withdrawal during the first five years from the start of the QROPS by sending a self-assessment tax return to HMRC.
Some unscrupulous advisors are telling investors that they can withdraw as much as they like after the five year period and the UK tax man will never know and the draw down will not be subject to the tax charge.
The problem is this is bending the rules and may not exempt the pension investor from the tax charge if HMRC find out about the withdrawal.
With the recent introduction of new tax agreements with countries that were formally secretive tax havens, and more likely to follow, HMRC may very well be tipped off.
Maximum payouts under QROPS
QROPS rules say that to qualify as a scheme, the pension provider must confirm that at least 70% of the pot must fund pension payments during retirement.
This means the maximum drawdown in cash from a pension pot must not be more than 30% of the fund value – and the only tax jurisdiction offering such a high draw down is the Isle of Man.
Everywhere else restricts the maximum withdrawal to 25% of the pension fund.
HMRC keeps a database of pension schemes that come in to the QROPS rules. Currently about 1,700 are listed.
Any scheme suggesting more than 30% of the fund can be drawn out as cash risks being booted off the list. If that happens and any investors are found to have drawn down in excess of the maximum cash limit, that amount is treated as an unauthorised withdrawal and subject to the 55% tax charge.
QROPS schemes in Singapore have already been delisted for flouting scheme rules.
HMRC takes the stance that the UK pension rules are generous to those investing for their retirement. A QROPS scheme should allow any UK pension investor retiring abroad to at least maintain their pension benefits as if they were still resident in the UK.
Schemes that promise enhanced benefits come under the HMRC microscope, and can be thrown off the list.
QROPS tax advantages to expats
Nevertheless, many QROPS schemes offer tax advantages to Brits retiring abroad.
Guernsey is a favourite place to establish a QROPS because of the tax friendly regime. Anyone leaving the UK should bear in mind that the QROPS does not have to be set up in the country where they are living.
The scheme can be set up in any tax jurisdiction outside the UK regardless of where the investor lives – as long as they are not UK resident.
This provides a lot of positive investment options, for instance:
- QROPS investments can be made in any currency
- QROPS investments in stocks and shares are not restricted to the UK stock exchange but any market worldwide
- The contentious UK rule of buying an annuity with the fund on retirement is removed
- Self managed schemes are available
- QROPS buy property
Why investors need expert QROPS advice
Because of the complexity of investing offshore, anyone considering switching their UK pension to a QROPS should take specialist advice from an independent professional advisor with a track record of setting up successful QROPS schemes.
Pension investors have a backstop to protect their cash because their current pension provider in the UK is not allowed to transfer any funds to an offshore scheme that does not meet HMRC requirements.
That’s great for pension transfers, but means anyone starting a new QROPS needs to check with HMRC that it’s a qualifying scheme before putting any money down.
To find out more we would advise speaking with the industry leading company called Qrops Adviser. Contact them to find out more about QROPS and how it can benefit your situation.
