Qrops.
QROPS Are Still Relevant for British Expats Living Abroad
The UK government have introduced full pension flexibility which means you can now draw down as much pension as you like. In the process, HMRC have destroyed a pension system over the last 30 years that used to be the envy of the world.
Final salary schemes are now all gone to newcomers, killed off by actuarial calculations which didn't take into account improving medicine extending lives and not enough new people entering the workforce.
You can now access your entire pension funds in the UK whenever you like and many are using it to buy property or land or invest in their businesses.
70% of all new businesses fail, whilst if you purchase property, you come out of a UK pension with only tax on income and death to now paying income tax on the rental, capital gains tax and facing 40% IHT. Not to mention stamp duty. Even if you wrap it in a company, you would still have annual accounting, auditing and company running costs...
Even for the most experienced, this is a challenge and it looks like the property bubble has burst with UK luxury homes falling in value by 14% last month.
Keeping a Pension in the UK
Keeping a pension in the UK usually means you are paying income tax of up to 45%. Most will pay somewhere between 20% and 40% on income. There is also a tax on death after 75. This is an issue, particularly for large pension pots. A 250,000 GBP pension pot at 50, can quickly grow to 600k - 750k GBP by retirement age. If left in the UK, any lump sum passed on could be taxed at 45% after the age of 75. Also, many of the Double Taxation Agreements that the UK has entered into force gives the taxation rights to the UK ,even if you are living abroad and paying tax abroad.
The Relevancy of a QROPS
Most QROPS on the other hand avoids all UK taxes once you are outside the UK, it avoids any tax on death in the UK and there is no tax on income in the UK as long as you remain tax resident abroad. Even if you return to the UK at a later date, a QROPS can still reduce your tax on death - please ask us for illustrations as it is too complex to go into detail here.
Income Tax on a QROPS
Here is where it becomes more complicated. You need to look at the individual rules of the DTA's. This is where you need a QROPS specialist. Malta has over 65 DTA's, but some of those agreements mean tax is shared or is zero or is up to 35% if no DTA exists with the country you live in retirement.
Hong Kong and New Zealand also have many DTA's. Each case is unique depending on your retirement destination, your risk profile, health factors, estate planning needs and drawdown requirements. There is no "one size fits all" solution.
Protection
This is where it becomes more complicated. Many UK SIPP's are allowing unregulated investments. We think this is a recipe for disaster down the line and think a big case in the UK may turn the industry on its head, just like it has done for QROPS. Using regulated investments is now paramount if you are considering a transfer to a QROPS or ROPS as it is now known.
If you are transferring out of a final salary scheme, you will be giving up pension guarantees linked to inflation in the UK and exposing yourself to much more risk, however for sophisticated investors with larger pensions, the tax advantages can over-ride the protection mechanisms with smart investing. Investing in funds with high sharpe ratios and low risk in a diversified portfolio should reduce risk in this area.
It is important if you are using a QROPS to seek regulated products. Mutual funds, OEIC's, unit trusts or ETF's listed on major stock exchanges such as the FTSE, Eurostoxx or NYSE.
UK Pensions Vs QROPS
You can keep your pension in the UK and exposed to UK taxation or transfer to a QROPS, where you are out of the UK tax net as long as you remain tax resident abroad and you have a choice of currencies and investments to reduce risk in your country of retirement. It is important to stress that risk management is paramount at this point. You can also just transfer money and sit it in cash if you are an ultra-low risk, conservative investor and just want tax efficiency for your pension.
Please note that you must also give up some degree of control for a QROPS, as the trustees must sign off on all investments, unlike UK SIPPs which are not overseen by trustees.