Should I transfer my UK pensions?
Broken down, British expats have the following options when managing existing UK pensions.
1: Leave the UK and retain your workplace or private pension with a UK provider
2: Transfer the UK pension funds into an International SIPP.
3: Transfer the UK pension funds into a Qualifying Recognised Overseas Pension Scheme (QROPS).
There are other choices and variations, of course, but typically the options come back to these. QROPS can allow people to take substantial benefits from their pension, including avoiding UK tax by transferring their pension into a QROPS.
While transferring to a QROPS can provide currency advantages, tax efficiency and flexibility in estate planning, to British expatriates, the question our advisers get frequently asked here at Lawsons Equity… is it right for everyone?
QROPS is widely thought about as the answer for UK Expats. It’s by no means a one-size-fits-all approach.
Qualifying recognised overseas pension schemes (QROPS) explained.
QROPS is a classification for international pension schemes that comply with HM Revenue & Customs (HMRC) regulations to receive transfers from UK-registered pension schemes.
Established in 2006, QROPS allows British expatriates to simplify their affairs by taking their pensions along with them. Schemes only make the HMRC list if they meet comparable conditions to UK pensions, like not being typically made available prior to the age of 55.
QROPS Qualifying Criteria: Is a QROPS suitable for you?
You may be eligible for a QROPS if you meet the following criteria:
- You have a pension of any value (excluding state pensions).
- You plan to live abroad or are currently living abroad.
- You do not plan to return to the UK, or you will be out of the UK for at least 5 years.
- You have not already bought an annuity.
- If yours is a final salary scheme, the scheme should not be already in drawdown.
Qualifying recognised overseas pension schemes (QROPS) and tax efficiency.
At present, EU residents can transfer UK pensions tax-free to a QROPS-based EU/EAA scheme. Transferring to a QROPS outside the EU alliance will activate a 25% UK ‘overseas transfer charge’.
The UK budget on March 3rd 2021 did not include modifications to QROPS, so transfers to EU/EAA-based QROPS continue to be tax-free for EU residents at present.
Now that the UK has departed the EU alliance, this 25% tax charge could be extended to capture EU transfers in the future.
When in a QROPS, funds are protected from UK taxes on income and gains, and no longer count towards your lifetime pension allowance (LTA). If you are already over the limit when transferring, 25% of the excess is charged, but funds are immune from further lifetime allowance penalties.
Examining the lifetime allowance and overseas tax charge.
Once you start taking benefits in your country of residence, qualifying recognised overseas pension schemes (QROPS) funds only become taxable.
How QROPS in Malta are taxed.
Malta has a long reputation for economic and political stability. It is a full member of the EU and has double taxation agreements with many leading nations. Malta’s QROPS as a result offers all the benefits of offshore pension planning, without risk associated with some other financial centres.
The Malta Financial Services Authority regulates its QROPS, and offers 0% inheritance tax, up to 30% as a tax-free lump sum, and a range of investment possibilities. The island also offers ‘third party’ QROPS; allowing investors to live any place they wish.
How QROPS in Spain are taxed.
When taking or accessing qrops lump sums and income from the UK pension, the general Spanish income tax rates apply to residents of Spain. These vary regionally, but tend to start at between 18.5% and 21.5%, and rise to a top rate in between 45.5% (Madrid) and 54% (Comunidad Valenciana).
Residents of Spain can find alternative tax-efficient choices for the reinvestment of pension funds, so speak to a Lawsons Equity adviser to find the most appropriate approach for you.
How QROPS in France are taxed.
Usually, UK pension and QROPS income is taxable in France at the income tax scale rates. For 2021, these start at 11% from EUR10,085, peaking at 45% for income over EUR158,122 (3%/ 4% surcharges apply over EUR250,000/ EUR500,000).
Under certain conditions, it is at present possible to take your entire pension fund as lump sum and pay only 7.5% tax with an uncapped 10% allowance.
Pension income in France also attracts 9.1% social fees (7.4% for pension income under EUR2,000 per month/ EUR3,000 per couple), unless you have EU Form S1 or are not affiliated with the French health care system.
For French residents, the reinvestment of pension funds into a suitable guarantee, a specialised form of life assurance, in which the underlying investments do not attract tax in France, could be more advantageous than a QROPS.
How QROPS in Portugal are taxed.
Portuguese residents who access QROPS or British pension income will face progressive income tax rates of 14.5% to 48% in 2021, unless you have non-habitual residence status (NHR). Under NHR, QROPS/UK pensions are taxed at a flat rate of 10% in Portugal for the first ten years.
You can continue to receive tax-free QROPS and foreign pension income for the remainder of your ten-year NHR period if you qualified for NHR before the regulations changed in April 2020.
You could find alternative tax-efficient choices for reinvesting pension funds as a Portugal resident if you do not have NHR status or your term has expired.
Qualifying recognised overseas pension schemes and flexible access.
While pensions in the UK can be limiting, many QROPS allow you to take as much cash or income as you want, and whenever you want.
You could draw a higher income in early retirement when you are most active, and reduce it in later years. You could take a lump sum and preserve the rest for emergencies, or pass it on to your beneficiaries.
This flexibility also has more potential to exhaust your money – unlike a Defined Benefit “final salary” UK annuity or pension, which provides a guaranteed income for the rest of your life.
Qualifying recognised overseas pension schemes, diversification and investment choices.
Qualifying recognised overseas pension schemes usually offer more choices than pensions in the UK regarding how your cash is invested, and are not as overexposed to UK assets. You can choose a flexible investment plan in a range of funds that suits your situations, objectives, timeline and risk appetite.
Qualifying recognised overseas pension schemes and estate planning flexibility.
Many pensions in the United Kingdom are payable to your spouse only after death. QROPS offers the option to include other beneficiaries. Rather than passing away with you or your spouse, your pension wealth could be passed on to any identified beneficiary, even across generations.
QROPS might also offer some protection from UK inheritance tax when pension assets are passed on to non-UK resident beneficiaries, even though they might still be subject to local succession tax.
Qualifying recognised overseas pension schemes and multi-currencies choices.
While pensions in the UK only pay in sterling, several QROPS allow you to withdraw and invest funds in more than just one currency. This is a huge advantage for British citizens living abroad, as it removes currency conversion costs and minimises dependence on pound/euro exchange rates.
Qualifying recognised overseas pension schemes and freedoms from UK legislation.
Funds in a QROPS are no longer regulated by UK pension laws, and are typically protected from future adjustments to UK regulations.
Be warned that unless you have transferred before 9 March 2017, you might continue to be subject to UK regulation and taxation if you move outside the EEA within five UK tax years of the transfer date.
Where the transfer falls within the unauthorised payment policies, tax penalties of up to 55% on the transfer value might apply. Even if you have transferred funds before the policies change.
Need QROPS advice? Let us help you.
Overseas pension transfers are complicated and a key target for pension fraud, so do not undervalue the significance of regulated advice. You should examine your variety of options to find the most appropriate pension solution for your specific situation.
All the same, you will need professional advice to find a suited product, understand cross-border tax issues, and essentially ensure your long-lasting financial security and safety in this ever-changing pension landscape.
Lawsons Equity’s qualified independent advisers will answer any questions and provide impartial guidance which will help you with the below:
- Understanding the benefits and drawbacks of a QROPS.
- Determine if a QROPS is suitable for you.
- Discover all the options available to you as an expat or UK resident.
- Get clarity on fees or costs associated with a QROPS.
- Get a second opinion about their advice if another adviser contacted you.
To schedule a no obligation initial consultation, click here. We look forward to hearing from you.
Lawsons Equity Malta
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.
The value of investments and income from them may go down. You may not get back the original amount invested
Lawsons Equity Limited is a company registered in Malta with company number C49564 and licenced by the Malta Financial Services Authority as Enrolled Insurance Brokers under the Insurance Intermediaries Act 2006, and to provide Investment Services under the Investment Services Act, 1994.
Lawsons Equity Ltd have passported their services across the EU. To see a full list of countries click here
In the United Kingdom, Lawsons Equity Limited is deemed authorised and regulated by the Financial Conduct Authority. Details of the Temporary Permissions Regime, which allows EEA-based firms to operate in the UK for a limited period while seeking full authorisation, are available on the Financial Conduct Authority’s website.