If you have acquired UK pension rights, and are intending to remain living outside of the UK permanently, then there maybe various potential benefits to be gained from transferring your pension into a QROPS.
Below is a list of some of the benefits and features of transferring a UK pension into a QROPS. It is important to note that each individual will have different priorities in relation to their financial goals and objectives from a QROPS, and an advantage to one person may not necessarily be an advantage to another. However, from our experience of advising expats all over the world in relation to their UK pensions, the following are considered the key benefits to most people:
Get your Pension Paid in the Currency of Your Choice
All UK pensions are paid in sterling, which means that if you are relying on your pension income to live off when you are living abroad, can create uncertainty as a result of currency fluctuations. With a QROPS pension, you can choose which currency you wish to have your pension paid in, and avoid any currency exchange risk.
Bigger Tax Free Lump Sum
Depending on the particular QROPS jurisdiction, you may be able to obtain a higher tax free lump sum at retirement, up to 30% of your fund value, as opposed to 25% under UK rules.
Receive Pension Income Gross of UK Tax
Another benefit of a QROPS transfer is that you will receive your pension income gross from the QROPS administrator (providing that your QROPS pension is based in a jurisdiction which does not have any withholding at source). Of course, you will still have to pay any income tax accorsing to the rules of the country you are resident.
It should be noted that if you can prove to the UK pension administrator that you are tax resident in another country, then it is usually possible to receive your UK pension gross aswell. However, this is not always possible (and if it is, the administrative process can be quite burdensome) and moreover with some civil service pensions, tax will automatically be deducted at source. Therefore, many UK expats permanently living abroad in places such as Spain will transfer their pension into a QROPS to avoid the uncertainty and hassle.
No Requirement to Purchase an Annuity
This is certainly one of the factors which most UK expats mention when talking about the advantages of a QROPS, and the key driver for many expats to transfer their UK pension into a QROPS scheme. Whereas under UK pension law there is an obligation to purchase an annuity, this obligation falls away with a QROPS.
There are 2 main perceived problems with annuities. The first and foremost problem is that annuity rates are at an all time low, currently hovering between the 2% and 3% level, depending on the particular features of the annuity contract. Thus even if a pensioner has saved hard all of his life, and built up a sizeable pension fund, that may not be enough to afford him or her the pension income were expecting.
Secondly, when the annuity holder passes away, if their spouse has already died, then the annuity payments will cease, and there is nothing to pass on to your beneficiaries. Contrast this to a QROPS pension, where you can draw down an income from the QROPS pension, and after you dies, any remaining funds left in your pension pot can be left to your loved ones.
Leave a Legacy for Future Generations
Under UK pension rules, any remaining pension fund is subject to a 55% inheritance tax charge. With a QROPS, no UK inheritance tax is payable, thus leaving more of your pension fund to leave to your beneficiaries.
Avoid Problems of Underfunded Final Salary Pension Schemes
Final salary pension schemes (or ‘defined benefit’ schemes) used to be seen as the ‘gold standard’ of pensions – a job for life once you have retired. However, the final salary schemes of many of the leading companies are now massively underfunded, nearly all of them have closed to new members. And more and more schemes are changing to the rules to either make you wait longer for your pension, or to even pay you less than you had expected to receive.
Whilst there are undoubted benefits of final salary schemes many people have opted for a QROPS to give them more control over their pension fund, and their retirement.
Wider Investment Choice
QROPS pensions generally offer a much wider choice of investments for plan members than a traditional UK pension, which may be subject to very strict investment guidelines. A much wider range of investments are open to QROPS, such as structured products, alternative investments, absolute return funds, commodities.
A QROPS is Not for Everyone
Despite the apparent benefits of QROPS transfers, a QROPS is certainly not for everyone, and specialist QROPS advice should be sought to determine whether a QROPS transfer is suitable in your particular circumstances.
There are 2 main reasons why a QROPS will not be suitable. The first reason is if there is a possibility that you may return to the UK at some stage in the future. Of course, no-one can predict what may happen at some stage in the future, but a transfer to a QROPS scheme is only suitable for people who intend to permanently live outside of the UK.
The second reason is that the size of the pension does not make a QROPS transfer economically viable. There are a number of fixed costs associates with a QROPS, which makes a transfer unsuitable for smaller pension pots. However, the good news is that there are now a number of low cost QROPS in the market, which make it possible for people with pension transfer values of as low as £20,000 to transfer their UK pension into a QROPS scheme.
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