Retiring Overseas

People intending on retiring abroad are likely to face cross border tax and currency issues. For those reasons, seeking appropriate professional advice seems essential. One common consideration would be what to do with any UK situ pensions. Most UK pensions can be transferred to non-UK pensions, some more easily than others. But just because they can, doesn’t necessarily mean they should. This article looks at some of the factors most relevant to any transfer decision.

UK pensions can only be transferred to Qualifying Recognised Overseas Pensions Schemes (QROPS). In order for any transfer to be authorised, the receiving scheme must be ‘recognised’ and to aid investors, HMRC helpfully publish a list of Recognised Overseas Pensions (ROPS) which they update monthly. But this recognition only means the scheme meets certain HMRC conditions and so investors should not take this as a sign that all ROPS may be suitable for their needs.

What is a QROPS?

It is a type of pension scheme first introduced in 2006. They are found in overseas jurisdictions such as Malta and Gibraltar. The HMRC conditions that must be met to be recognised as a QROPS are, broadly speaking, similar to UK registered pensions, e.g. benefits cannot be taken before age 55 (except in cases of severe ill health). QROPS administration charges tend to be more costly than a UK SIPP. Also, QROPS administrators do not usually buy/hold their clients chosen investments directly and this means investments may be held (custodied) via an investment platform or offshore investment bond. Both of these add further charges and the offshore bond route can be particularly expensive. Anyone considering this route should be particularly careful to understand all charges involved including but not limited to: Initial advice/product set-up charge, annual product (QROPS) fees, investment administration fees (platform and/or offshore bond), investment portfolio fees, ongoing advice fees.

Warning

The tax rules relating to QROPS can be complex and are subject to change. The points made below are therefore based on our understanding of the current (April 2023) legislation. As always, if you feel any of the points made are relevant to you or contrary to your understanding, we encourage you to seek advice.

Possible Issues Prior to Transfer

Overseas Transfer Charge (OTC)

Since the 9th March 2017, any transfer to a QROPS may be liable to a 25% Overseas Transfer Charge (OTC). There are five scenarios where the OTC will not apply and the two that are most applicable to individuals are:

• the member is resident in the same country in which the QROPS receiving the transfer is established (this is quite unusual)
• the member is resident in a country within the European Economic Area (EEA) and the QROPS is established in a country within the EEA (this is more common)

If a member leaves their new country of residence within 5 full tax years of leaving the UK, the OTC will apply if the above conditions cannot still be met.

Lifetime Allowance Test

The March 2023 Budget announced changes to the lifetime allowance that took effect from 6th April 2023. In essence, this means now that no lifetime allowance charge will apply for transfers greater than the available lifetime allowance (LTA). However, a transfer to a QROPS will remain a Benefit Crystallisation Event (BCE). This means the transferring scheme will still ‘test’ the transferred amount against the investor’s available lifetime allowance (LTA). Tax-free cash is still limited to 25% of the investor’s available LTA and so the BCE determines what tax-free cash may be available in the future.

Tax-free lump sums

Although QROPS rules broadly match UK pension schemes, some jurisdictions allow a tax-free lump sum of 30%, i.e. slightly greater than the 25% from a UK pension. However, the ability to take tax-free cash depends upon the tax treaty that applies between the member’s country of tax residence and the QROPS jurisdiction. (And this sometimes comes down to how the country defines what a pension is). Most of these treaties do not mention or protect any tax-free cash rights the member built up in the UK pension. Thus, whilst the QROPS jurisdiction may pay out a lump sum with no tax deducted, the new country of residence may look to tax it as an income payment. For example, Article 18 of the treaty between Spain and Malta makes no mention of tax-free lump sums.

Reasons to transfer?

Receiving income without UK income tax deducted

Many QROPS articles on the web like to say that your UK
pension/s will be subject to UK income tax, even after leaving
the UK (if you draw an income from them) whereas the
jurisdictions where the QROPS are based usually deduct no
(or little) income tax. This is true but potentially misleading.
Any income received, e.g. from a QROPS, generally needs to
be declared to the tax authorities in the country where you
become a tax resident.

UK government pensions will remain subject to UK tax on income paid from them. This does not mean the income is taxed twice though, instead the new tax authorities allow for any UK income tax paid when calculating any tax liability in the new country of residence. However, income from UK situ private pensions is treated differently. If you are now resident in a country with which the UK has a tax treaty (highly likely) and have registered with the tax authorities there, you can contact HMRC to let them know you are no longer UK tax resident. This entails completing a form and proving you have registered with the tax authorities in the new country. HMRC will then issue an NT (no tax) PAYE code that allows the private pension provider to make gross payments, i.e. with no UK income tax deducted. Like the QROPS, you then declare this gross income in your new country of residence. In other words, if you follow the steps required, a QROPS has no benefit over a UK situ private pension when it comes to the deduction of UK income tax.

Foreign currencies

A QROPS can be denominated in other currencies such as the Euro or US Dollars whereas UK pensions are denominated in Sterling. Any payments received from a QROPS can therefore be paid in the denominated currency whilst the UK pension would make them in Sterling. This may be useful if you want to receive income in the new currency, e.g. the Euro in Spain, as it avoids charges for currency conversions. But don’t mistake this convenience for removing currency risk. Unless all of the underlying investments are also Euro denominated, you still have currency risk. Having your pension denominated in your new currency is only a real benefit if you would pay excessive charges to convert a Sterling payment into your desired currency.

Improved death benefit position

UK pension death benefits are tax efficient if the member dies before reaching age 75 as their UK resident nominated beneficiaries can receive tax free benefits (income, lump sum, or both). If the member dies after reaching age 75, then their UK resident beneficiaries will pay UK income tax on any withdrawals. (If the beneficiary is non-UK resident, it will depend upon tax position in country where beneficiary is resident). If they transfer to a QROPS and die before 75, the position is the same as for a UK pension.

If a non-UK resident QROPS member dies after turning 75 and meets one of the two criteria below, any UK resident beneficiaries can make tax free withdrawals.

Criteria for UK resident beneficiaries to withdraw tax free if member death after 75

1. Transfer took place before 6th April 2017 and deceased member had been non-UK resident for more than 5 consecutive UK tax years
2. Transfer took place after 6th April 2017 AND, 5 calendar years have elapsed since transfer AND, member had been non-UK resident for more than 10 consecutive UK tax years

If a member was non-resident but did not meet those prescribed periods, UK pension rules apply to a QROPS. 

Returning to the UK

Anyone holding a QROPS needs to be aware that returning to the UK will change the UK tax treatment.

Return within 5 years – Income Tax

There are anti-avoidance rules which look to stop people leaving the UK for ‘short’ periods of time to achieve a more favourable tax outcome in another jurisdiction. With regards to residence, the applicable rules to be aware of are the temporary non residence rules. Broadly, these state that any period of less than 5 years (actual years, not UK tax years) will result in a person being deemed as temporary non-resident. With regards to a QROPS, this would likely mean that any income (and possibly lump sums) taken from the QROPS whilst non-resident becomes taxable in the UK in the tax year of your return. Credit will be given for any tax paid in the other jurisdiction, but this could still mean a sizeable UK tax bill as the income would be treated as arising entirely in the year of return. Said differently, income that may have been taken over different tax years would be treated as if it had all been paid in the tax year of return (which may push a person into a higher rate tax band).

Death Benefits

As soon as a member becomes a UK resident, the death benefits for a QROPS revert back to that of a UK pension.

Final thoughts

It seems clear that any decision to transfer to a QROPS needs very careful consideration. Many of the perceived benefits of a QROPS disappear when all factors and costs are considered. So far as we can tell, the only one that seems to offer a notable improvement is improved death benefits when death occurs after 75 and the conditions noted above can be met.