By Adrian Hook, Partner, Blevins Franks
While transferring to a QROPS can offer tax efficiency, estate planning flexibility and currency benefits for UK expatriates, is it suitable for everyone?
One of the many UK pension options for British expatriates today is transferring to a Qualifying Recognised Overseas Pension Scheme (QROPS). Despite being widely seen as the answer for expatriate retirees, QROPS are by no means a one-size-fits-all solution.
What is QROPS?
QROPS is a label for foreign pension schemes that meet HM Revenue & Customs (HMRC) rules to receive transfers from UK-registered pension funds. Introduced in 2006, this enables British expatriates to simplify their affairs by taking their pensions with them. Schemes only make the HMRC list if they meet similar conditions to UK pensions, such as not being generally accessible before age 55.
Tax implications
Currently, EU residents can transfer UK pensions into an EU/EEA-based QROPS tax-free. However, transferring to a QROPS outside the bloc will trigger a 25% UK ‘overseas transfer charge’. Note there are no Portuguese schemes on the list of approved QROPS, so you need to take care to choose an eligible scheme in another EU/EEA country to avoid penalties.
The UK 2021 budget did not include any changes to QROPS, so transfers to EU/EEA-based QROPS currently remain tax-free for EU residents. But now the UK has left the bloc, this 25% tax charge could potentially be extended to capture EU transfers in future.
Once in a QROPS, funds are sheltered 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% is charged on the excess, but funds become immune from further LTA penalties.
Otherwise, QROPS funds only become taxable once you start taking benefits in your country of residence.
How QROPS are taxed in Portugal
Portuguese residents accessing QROPS or UK pension income will face progressive income tax rates ranging from 14.5% to 48% in 2021, unless you hold non-habitual residence (NHR) status. Under NHR, QROPS/UK pensions are instead taxed at a flat rate of 10% for the first decade in Portugal. If you qualified for NHR before the rules changed in April 2020, you can continue receiving tax-free QROPS and foreign pension income for the remainder of your ten-year NHR period.
If you do not have NHR status (or your term has expired), you could find alternative tax-efficient options for reinvesting pension funds as a Portugal resident, so take personalised advice to establish the most suitable approach for you.
Flexible access
While UK pensions can be restrictive, many QROPS allow you to take as much cash or income as you like, however and whenever you want. You could, for example, draw a higher income in early retirement when you are most active and reduce it in later years. Or you could take a lump sum and preserve the rest for a rainy day or to pass on to your heirs.
But this freedom also brings more potential to exhaust your funds – unlike a UK annuity or ‘final salary’ pension which provide a guaranteed income for life.
Diversification and investment choice
QROPS usually offer more options than UK pensions for how your money is invested and are not as over-exposed to UK assets. You can choose a flexible investment plan across a wide range of funds to suit your circumstances, objectives, timeline and risk appetite.
As the value of any investment can go down as well as up, this introduces an element of risk to your retirement funds that is absent from a guaranteed annuity. However, an active, well-diversified investment approach can manage and minimise risk.
Estate planning flexibility
While most UK pensions are only payable to your spouse on death, QROPS offers the option to include other heirs. So rather than dying with you or your spouse, your pension wealth could pass to any named beneficiary, even across generations.
QROPS may also offer some protection from UK inheritance tax when passing pension assets to non-UK resident heirs, although they may still be subject to local succession taxes.
Multi-currency options
While UK pensions only pay out in sterling, some QROPS allow you to invest funds and make withdrawals in more than one currency. This is a major advantage for British expatriates in Portugal as it removes currency conversion costs and reduces dependence on pound/euro exchange rates.
Freedom from UK rules…to a point
Funds in a QROPS are no longer governed by UK pension legislation, so are generally protected from future changes to UK rules. Beware, however, that (unless you transferred before 9 March 2017) you could still be subject to UK legislation – 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 rules, tax penalties of up to 55% on the transfer value can apply – potentially even if you moved funds before the rules changed.
Regulated, tailored advice is crucial
Overseas pension transfers are complex – and a key target for pension scams – so do not underestimate the value of regulated advice. You should explore your full range of options to establish the most suitable pension solution for your particular circumstances. If you decide to transfer, act soon, before the rules potentially change post-Brexit. In any case, you will need specialist guidance to find a suitable product, navigate the cross-border tax issues, and ultimately secure your long-term financial security in this ever-changing pensions landscape.
For more information, visit the Blevins Franks QROPS webpage.
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. All advice received from any Blevins Franks firm is personalised and provided in writing; this document, however, should not be construed as providing any personalised taxation and/or investment advice.
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