Pension planning for British expats
Until recently, British expatriates with pension savings in UK based plans have had little option but to remain in their existing scheme, leaving them little control over their investments or how they receive benefits from them. In many cases, this can lead to inappropriate investment and currency choices or benefit options which may not be appropriate given the country in which they now live.
Following the introduction of new UK legislation, these problems can now be addressed through use of a Qualifying Recognised Overseas Pension Scheme (QROPS), established outside of the UK and recognised by Her Majesty’s Revenue and Customs (HMRC), to accept all UK Pension Savings.
QROPS represents a new landscape of tax and retirement options for individuals; however there is a plenty of misleading and incorrect information written about these schemes.
To give a brief overview:
Once an individual becomes an expatriate, their UK pension schemes typically become ‘frozen’ so no further contributions can be made. In addition, the investment strategy is in most cases a ‘one size fits all’ approach which cannot accommodate people with different risk profiles – for example someone who is 25 will have a different investment strategy to someone who is 60, therefore returns are relatively low.
By the age of 75 UK pension plan holders must buy an annuity so they lose ownership of the investment, in return for an annual payment, which can then be subject to UK tax (currently between 20% and 40%). On death, a spouses or widows pension can be up to half the original sum and on their death the benefit often cannot be passed on to children or other beneficiaries.
Rather than a domestic scheme in your country of residence, a QROPS plan can be based in a neutral fiscal jurisdiction such as Guernsey, where the relevant pension rules allow significant advantages and greater flexibility than UK plans.
The key benefits of a QROPS may include:
- No requirement to purchase an insurance company annuity which means you retain control of the pension assets.
- The ability to pass on remaining pension assets to nominated beneficiaries on death.
- A wider choice of acceptable investments offered over UK plans.
- Greater flexibility around the level and manner of income payments which can be taken from the plan.
- The underlying investments and income payments can be denominated in a choice of currencies to reduce the risk of currency fluctuations.
- Where held offshore, income payments made without the deduction of UK income tax with income tax payable as appropriate in the jurisdiction in which it’s received.
The appropriate use of QROPS can provide substantial tax planning opportunities. The tax deduction from the residual value of a UK pension contribution on death can be as high as 82%. QROPS can mitigate such taxation.
Many people only think of their pension in terms of retirement income, due to legacy issues with life annuities and the rigid framework of many products. But the flexible structure of QROPS regarding the investment content, benefit type and the way any assets remaining in the scheme can be distributed, brings a new dimension to their use in financial planning.
The following options are all available under a Guernsey QROPS:
- Optional tax free lump sum.
- Lifetime annuity
- Regular drawdown
- An annuity to spouse or dependants.
- Payment of the proceeds to a trust(s) for Named Beneficiaries.
- Payment of the proceeds to an international pension plan(s) for Named Beneficiaries.
- Retention of the assets in the plan for distribution at a future date but within two years of the Member’s death.
- Winding up of the plan and payment to the Member’s estate.
- Winding up of the plan and payment directly to Named Beneficiaries.
The ability to control structured income payments and distribution gives Advisors a new dimension for succession and estate planning. Also, the plan has no cap on contributions and distribution of assets is currently not subject to UK IHT, which makes the QROPS an efficient vehicle for providing income and passing on assets to dependants.
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>> For independent advice on pensions contact William Pitman via www.occia.co.uk. William is a partner at St James's Place.