A number of readers have asked how the process of transferring UK pensions overseas typically works. In this part one of a two-part column we will look at the people and agencies involved in the transfer process and the various associated costs. In part two, we will look at the paperwork that needs to be completed and steps that need to be taken in order to effectuate a UK pension transfer.
First let’s identify the parties that may be involved in the transfer process:
– At a minimum your UK pension provider and the QROPS administrator must be involved.
– In the case of an occupational scheme, your pension might be administered by a financial services firm on behalf of your company; so your corporate pension administrator as well as the pension company representative might be involved.- There may also be an intermediary or facilitator. Many firms that advertise UK pension transfer services do not actually administer a particular QROPS; rather, what they do is gather the necessary client information and advise the client as to the pension transfer process. The intermediary may work with a number of QROPS located in various jurisdictions, and therefore may be able to advise the client as to the best jurisdiction for his/her purposes.
– Once your pension has been transferred to the QROPS, you may wish to invest your money and at this point an investment advisor may be involved.
Now let’s summarize the costs you may face when undertaking to transfer a UK pension to a QROPS:
– On the UK side there may be an administration fee from your pension provider. There may also be fees for withdrawing from certain types of investments or for cancelling your investment account.
– Intermediaries typically charge an up front fee for the pension transfer and may also (or instead) receive ongoing fees from the investments into which your transferred funds are placed once they are transferred to the QROPS.
– The QROPS administrator may also charge a transfer fee and/or may receive an ongoing administration fee either from you or from the investments into which you place your money within the QROPS.
– Investment advisors typically charge ongoing investment management fees and may also charge a one-time fee when each investment is purchased. So if you plan to invest your money within the QROPS then you will have these fees as well (but of course you would have similar fees in the UK pension plan). Often the ongoing fees are not spelled out – rather they are taken from your invested amounts over the course of time.
In addition to these direct costs, you should consider “opportunity cost”. There are many good reasons to transfer your pension scheme to a QROPS: Typically there is no need to annuitize the pension, you can leave the residual amount to your heirs, you may be able to withdraw a greater lump sum than under UK regulations, and so on. However, you should also consider what you will be giving up, especially in the case of a final salary pension plan. This type of plan (also known as a defined benefit plan) typically gives you payments for life after you retire based upon the amount you were making when you left your employer. This could be a substantial amount and may be more than you could realize by transferring your pension and investing your money – thus leaving your pension savings open to the vagaries of investment markets.
One final potential cost to consider is that of taxation. You may be able to move your UK pension to a QROPS in a jurisdiction where you will benefit from a lower tax rate on the pension funds you withdraw, but tax issues can be complex. The tax treatment of your pension may depend upon the provisions of a tax treaty involving your country of residency and the UK (or your country of residency and the QROPS jurisdiction). By moving your pension from the UK to a QROPS in another jurisdiction you may be jeopardizing benefits available to you under a UK/country of residency tax treaty. This is the case, for example, for US residents who can benefit from tax treaty provisions in the UK/US treaty but who may lose these benefits by transferring to a QROPS in a country with which the US has no treaty.