Background Legislation

Major legislative changes imposed by Her Majesty's Revenue & Customs (HMRC) in the United Kingdom, came into force on April 6th 2006. Known as Pensions 'A' Day, the new rules affect virtually every UK pension scheme (other than state benefits). Anybody who has ever worked in the UK and may have left a pension scheme there is likely to be affected if they have not yet started to receive an income from it.

The Challenge - Withdrawals and Taxation

Individuals who leave their pension schemes invested in the UK are likely to only be able to access 25% of their fund as a tax free cash lump sum, at the earliest, from the age of 50 rising to age 55 from 2010.

The resulting 75% of the fund cannot be taken as a cash lump sum, but must instead provide an income which is subject to processing delays as well as international banking charges and exchange rate fluctuations - but more importantly, INCOME TAX. The compounding effect of these reductions means that an individual is likely to have to survive a minimum of at least a further 20 years to get the 75% back in their pocket from the point when they start to receive income!

Furthermore, anybody trying to make withdrawals outside of these limits is likely to face penalties, in the form of a tax charge imposed by HMRC, of up to 55% of their pension fund.

The Solution - QROPS!

The new rules and changes have given rise to the Qualifying Recognised Overseas Pension Scheme (QROPS), which is an investment vehicle that allows existing UK registered pension schemes to be transferred, not only within the UK, but more importantly overseas for those individuals residing elsewhere. To qualify as a QROPS, a pension scheme must be officially recognised by HMRC (as it is not possible to register an overseas scheme with HMRC) and satisfy strict reporting duties, otherwise the status is lost. A QROPS must be registered as a pension scheme and recognised for tax purposes in the country or territory where it is established, which must be outside of the UK.

An individual can transfer their UK registered pension scheme(s) to a QROPS which is registered anywhere else in the world regardless of where they actually reside. If the individual stays in the UK, the QROPS is able to pay benefits in line with and that do not exceed those which could be paid if funds were still held in the UK scheme. However, on migrating and ceasing to be a UK tax resident for five full UK tax years there are no longer any reporting requirements or restrictions on the QROPS to the HMRC and only the rules pertaining to the QROPS and its place of origin / registration apply.

Basically, the five year period is a time of transition over which the rules of a UK scheme continue to apply; after this period, the rules of the QROPS prevail.

Example 1 - An individual with a UK Personal Pension, aged 35, goes to live and work in Australia, ceasing to be UK tax resident on 15th October 2008. They commence the process of transferring their UK pension scheme to an Australian QROPS, which finally concludes in May 2009. On 6th April 2014 the scheme effectively loses all obligations to HMRC and falls entirely under Australian pension legislation - i.e. all proceeds can be taken as cash lump sums, entirely tax free, albeit not until age 60. (Australian schemes are locked in until age 60)

Example 2 - An individual with a UK Personal Pension, any age, goes to live and work in the USA, ceasing to be UK tax resident on 15th October 2008. The Internal Revenue Service in the USA will not permit a transfer to a US registered QROPS even though they exist and thus benefits will have to be taken in line with UK legislation and will therefore be taxable and involve receiving an income stream over many years before the total funds are utilised.

Example 3 - An individual with a UK Personal Pension, aged 35, goes to live and work in Spain, ceasing to be UK tax resident on 15th October 2008. They commence the process of transferring their UK pension scheme to a Spanish QROPS, which finally concludes in May 2009. On 6th April 2014 the scheme effectively loses all obligations to HMRC and falls entirely under Spanish pension legislation - i.e. likely to involve the locking in of funds for many years depending on the particular Spanish QROPS scheme selected.

Note: for all the above examples, the client could transfer their UK pension scheme to a suitable QROPS where all proceeds can be taken as cash lump sums, on or after 6th April 2014, entirely free of UK and overseas tax. Click here for further details.

Example 4 - An individual with a UK Personal Pension, aged 49 and living in the UK, commences the process of transferring their UK pension scheme to a Spanish QROPS, which finally concludes in May 2009. Then at the age of 50, the individual goes to live and work in Australia, ceasing to be UK tax resident on 15th March 2010. The individual can immediately withdraw up to 25% of the fund as a tax free lump sum as UK rules prevail, but on 6th April 2015 the scheme effectively loses all obligations to HMRC and falls entirely under Australian pension legislation -i.e. all remaining proceeds can be taken as cash lump sums, entirely tax free, albeit not until age 60. (Australian schemes are locked in until age 60)

Note: the individual could transfer their UK pension scheme to a suitable QROPS where the 25% tax free lump sum could still be taken immediately and then the remaining balance can be taken as a cash lump sum, on or after 6th April 2015, entirely free of UK and overseas tax. Click here for further details.

The Process

The entire transfer process involves a considerable amount of administration to ensure full compliance with the new legislation and can take up to 7 months to complete.

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Expat Focus is pleased to offer the services of a Registered Investment Advisor and a QROPS administrator specialising in UK pension transfers. Click here for further details.