QROPS Advice for Expats

There are a plethora of companies offering QROPS advice on the internet, it is difficult to have a session on the internet without seeing links to QROPs advice articles. So, what are QROPS? Chris gives us the financial low down.

Retirement © by 401K

The acronym stands for Qualifying Recognised Overseas Pension Schemes and they have been available since 2006 when HMRC ( Her Majesty’s Revenue and Customs) implemented a number of changes to pensions’ legislation in order to simplify UK pensions, going forward( I shall come back to this point). QROPS provide a vehicle, for those with UK pensions (either private or company schemes), into which these pensions can be transferred.

There are a number of jurisdictions across the World that offer QROPS and the list of the schemes that are recognised is available on the HMRC website. However, people would be well advised to read the wording on the website. Being on this list does no infer HMRC approval, despite what a lot of websites might say, as there is no approval process. This is an extract from HMRC’s website -

Publication on the list should not be seen as confirmation by HMRC that it has verified all the information supplied by the scheme in its application. If a scheme has been included on this published list in circumstances where it should not have been included because it did not satisfy the conditions to be a recognised overseas pension scheme, any transfer that has been made to that scheme could potentially give rise to an unauthorised payments charge liability for the member

Furthermore, generally speaking, the QROPS providers do not give financial advice to the public and so the public would normally need to speak to a financial adviser.

Some of the basic rules are (and these are subject to some tweaking with some new rules expected to come into force on 6th April 2012) as follows-

  • 70% of the transferred funds must be used to provide an income in retirement.
  • Income for life. HMRC do not refer to an annuity but refer to the idea of an annuity and state that income ” is payable until the member’s death or until the later of the member’s death and the end of a term certain not exceeding ten years. For example, we would not consider a payment to be made as an income for life if 50% of the fund was paid out one year and the other 50% in the next year.”
  • Anyone that transfers their pension will need to sign an acknowledgement that they understand that they understand the tax implications of the transfer.
  • The reporting period, whereby payments to members must be reported to HMRC within 5 full tax years of that member being tax resident in the UK, is to be extended to 10 years after the member transferred out of their former UK pension scheme.
  • Local residents of the jurisdictions where the QROPS is based must be treated the same way for tax as non-residents that transfer their pension monies to that jurisdiction.
  • Benefits cannot be accessed prior to the age of 55

What are the potential benefits?

There are numerous benefits including, greater investment freedom, no Inheritance Tax charges on death for UK domiciled expats, no 55% tax charge upon death during retirement ( as is the case for UK retirees who have not bought an annuity), and protection against creditors.

QROPS can avoid the possiblity of being “ double taxed” on income for expats should they reside where there is no Double Taxation Agreement with the UK when they retire. An extremely important issue is also foreign exchange, adverse currency fluctuations can cause havoc to retirement income.

In summary, QROPS should deliver the right pension at the right time, in the right currency, in the right format, at the right tax rates taking account of the right tax residency at retirement. It should make sure that the right money goes to the right people upon death before or during retirement.

What steps should an expat take when considering what to do with a UK pension?

The starting point is an analysis of the UK pension and what benefits it offers. Whilst the simplification rules for pensions came out in 2006, for those that have benefits accrued prior to this date it is important to understand the previous pension regimes and there are quite a few of them. Look at what guarantees are provided by the existing schemes, especially private sector and public sector final salary schemes. Ask the adviser to provide an analysis to calculate whether the transfer value offered is realistically going to benefit the expat, should a transfer take place. Once transferred, these guarantees are lost.

An in-depth understanding of UK pensions is essential. Therefore, always make sure your advisers have professional pension qualifications relating to pension transfer advice ( ie G60/AF3 ) and ask them to provide evidence of this, if need be, and always check their backgrounds and experience( the internet now provides the opportunity for people to do some research into people’s professional past).

I like using, amongst other things, Linkedin to look at past experience, the FSA ( UK Financial Services Authority register, only started in 2001) website to see if they have any UK experience and a hint of what that was, and the Chartered Insurance Institute’s member page to see if that shows up any qualifications.

Make sure the advisers are regulated in the country where they provide advice ( if that country requires it. All the EU countries do!). A little due diligence by an expat can save a lot of problems later.

Should the expat and adviser agree that a QROPS is the way forward, then it is important that the monies transferred are properly managed by an appropriately qualified and regulated investment manager, which may not necessarily be the same as the financial adviser.

Future Provision

Of course, all of this relates to pension funds that have accrued in the past. It is probable that the majority of expats will not get a full state pension and will have to rely on private savings, pensions and possibly ongoing earned income in old age. It is important that the gap between the current provision and future needs is bridged and this can be the subject of a future article.

Ask the adviser if they provide a fee charging structure for their service, instead of just commission only, and don’t forget to make sure that the amount of commission/fees is agreed before proceeding with transaction. Advice is not free and steer away from advisers that suggest it is. If a financial product offers the adviser commission, it reduces the potential returns of the investment accordingly.

About Chris

My name is Christopher Lean, I am married to Radka and have two young children. We live in Toužim and I work for an IFA called Square Mile Financial Services sro in Prague, I also write financial articles for expat websites. www.squaremilefs.com

My wife and her sister run a agricultural chemical testing company near Karlovy Vary, a town that filmgoers will know from the James Bond film “Casino Royale”, which was filmed here, and from the annual Karlovy Vary Film Festival.

We are surrounded by beautiful countryside and are both keen cyclists and we have four horses that the family ride regularly. In the summer, it is a popular holiday destination for visitors from Holland, Germany and Russia. Most of my free time is spent with the children, though I do find the time to visit the local hospoda (pub) to practice my Czech at the weekends.

2 Comments

  1. Ray Castle
    April 2, 2012

    Chris, An excellent informative and unbiased article giving background and directing readers on the way forward. The UK Government have changed the rules for QROPs from 6 April because some have tried to pay out more than allowed had the benefits stayed in UK. As a result QROP benefits will be monitored by HMRC, UK tax man, for 10 years instead of the previous 5.

    Reply
  2. Christopher Lean
    April 2, 2012

    Ray,

    Thanks for the response.

    HMRC have clearly drawn a line in the sand between past practices and what they expect in the future. They will be sure to monitor this market more closely.

    As far as I am concerned, QROPS should not be seen as a product but as an advice based solution to the longer term needs of the client.

    At face value, QROPS can appear to be fairly simple structures. However, the knowledge required to provide all the necessary advice in this complex area of financial planning is substantial(often needing the inclusion of tax experts from different jurisdictions). There are issues of residency, future residency, domicility, spouses’ domicility and the list goes on and on.

    Whilst the answer might often appear simple, getting to the answer is certainly not.

    Chris

    Reply

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