- Are your pension funds in excess of the Lifetime Allowance (LTA), currently £1.073m? If so, they may be exposed to possible future taxation.
- Would you like to decide in which currency your pension is accrued and paid?
- Could you have a need for a cash lump sum of up to 30% of your pension from age 55?
- Do you want flexibility and control over how and when you take your pension, and to be able to choose whether or not to buy an annuity?
- Would you like decide for yourself in which country your pension will be taxed and how it will be managed?
- Would you like your beneficiaries also to inherit 100% of your UK pension?
- Are you aware of the impact Brexit could have on your pension fund?
This article covers the above points and answers frequently asked questions about how transferring to an overseas scheme – known as a QROPS may be of benefit to you.
There are two main types of UK pension arrangements – Defined Contribution (DC) schemes and Defined Benefit Schemes (DB). DC schemes are individual pensions that simply build up a pot of money that you can use to provide income in retirement.
Although both types of scheme can be transferred to a QROPS, transferring a DB arrangement is more difficult due to its complexity and the fact that you will be giving up a guaranteed pension. Please contact us for more information on Defined Benefit transfers.
Pensions that are left in the UK may be subject to unique tax liabilities. Since new pension rules implemented by the HMRC in 2006, under the Qualifying Recognised Overseas Pension Scheme regime (QROPS), you may be able to transfer your pension funds to another jurisdiction and protect your investment from UK tax obligations.
In our Netherlands office, we will provide you with the expertise to guide you into making the right decision when transferring your UK pension both from a local and UK perspective.
See below for frequently asked questions to learn more on the subject and how transferring to a QROPS could benefit you.
Why should you transfer a UK Pension into a QROPS Regime?
- QROPS gives you the option to denominate your pension fund in a choice of all major currencies.
- There is greater investment choice and control. Within QROPS you can have access to all major asset classes.
- There is access of up to 30% commencement lump sum of your pension value at the age of 55.
- Possibility to consolidate numerous pensions into one single scheme
- No obligation to buy an annuity, therefore greater flexibility when you begin to drawdown.
Income Tax
UK Tax
All pension payments made to a UK resident are taxed as earned income. This includes small self-administered schemes (SSAS), DC schemes such as personal pensions and self-invested pension plans (SIPPs), and Occupational Schemes (including DB schemes).
Netherlands Tax
If you are a Netherlands-based expat, you can benefit from the “Double Tax Treaty” that exists between the Netherlands and the UK. You will not have to pay UK income tax on pension payments in most circumstances, but will have to pay income tax in the Netherlands at progressive rates up to 52%. This applies only to individuals who were not UK residents in the five years prior to death or payment. The Treaty prevents you having to pay tax in both countries.
Other Taxes
Pensions in the UK are subject to unique tax liabilities not present in other countries. You could mitigate some of these by transferring your scheme to a QROPS. Two of the more important tax considerations are the Lifetime Allowance (LTA) and the newly-introduced Overseas Transfer Allowance (OTA)
The Lifetime Allowance (LTA)
• The Lifetime Allowance (LTA) is a limit on the amount of ‘tax-privileged’ pension fund that an individual can build up without any additional tax being payable. This limit is currently £1.073m and, until this year’s Spring Budget, any excess was taxed at 25% (or 55 % if the excess was taken as a lump sum). The trigger point for the charge is a ‘crystallisation event’ – where, for example, you start to draw benefits from your pension or transfer them to a QROPS (a transfer to another UK scheme is not classed as a crystallisation event).
• In a surprise move in the Spring Budget of 2023, the Chancellor abolished the tax on any excess following a crystallisation event, with the LTA itself scheduled to be abolished in April 2024.
• There is no guarantee that these proposals will not be reversed. Indeed, the Labour Party has said that it will reintroduce the tax if it wins the next General Election. As things stand, however, there is currently no excess charge for a crystallisation event for any fund in excess of £1.073m.
• If your pension fund is near the LTA, you can protect against any potential excess charge by transferring it to a QROPS.
Overseas Transfer Allowance (OTA)
• You may think that because the LTA excess charge has been abolished, you can ‘crystallise’ (transfer) your UK funds to a QROPS with no charge even if you are over the current LTA of £1.73m. However, the Government has introduced a new charge known as the Overseas Transfer Allowance (OTA). The charge is 25% of the excess over £1.073m for any transfer from a UK scheme to a QROPS. A transfer to another UK arrangement – such as to a SIPP or another Personal Pension – is exempt.
• However, you could still give serious consideration to a transfer to a QROPS even if your fund is in excess of the OTA. The reason for this is simple – any excess charge will simply increase over the years as your fund grows. You may wish to rid yourself of any future potential liability by transferring to a QROPS sooner rather than later.
• For anyone with a fund under £1.073m, the picture is even clearer; you can transfer to a QROPS without any charge and be completely protected from any such charge in the future.
Flexibility and control
Most DC arrangements allow access to a Flexi Access Drawdown (FAD) system which allows you to take payments from your scheme as and when needed without having to buy an annuity (a fixed payment for life). The same is true for a QROPS, however, but if you happen to have an older type of DC arrangement that does not allow FAD then this would be a factor in transferring. Whilst you could simply transfer to a UK plan that allows FAD, a QROPS might be more suitable for some of the reasons stated above.
DB schemes, whilst offering very valuable guaranteed pensions, do not have any such flexibility – a set pension is payable for life and you cannot alter the payment amount or its frequency. A transfer to a QROPS will allow you to access FAD but, again, you could access this simply by transferring to another UK plan that allows FAD.
Currency
For many expats, having to receive payments from a UK pension scheme denominated in GBP is an inconvenience; it also exposes them to currency risk. By transferring to a QROPS, you can denominate your income in the currency of your choice.
Cash Lump Sum
Some QROPS are able to pay up to 30% of the value of the fund as a cash lump sum. This is only a slight improvement over the UK regime where it is 25%. You should also be aware that whilst the lump sum is tax-free to a UK resident, it may not be the case in other countries where it could be taxed as earned income.
Why should you consider transferring a UK Pension into a QROPS?
• You can protect your pension fund from potential LT A and OTA charges.
• A QROPS gives you the option to denominate your pension fund in a choice of all major currencies.
• There is greater investment choice and control. A QROPS offers access to all major asset classes including non-UK investments.
• There is access of up to 30% of your fund as a lump sum from age 55.
• You can consolidate numerous pensions into one single arrangement.
• There is no obligation to buy an annuity (in cases where your arrangement does not allow FAD) which means you have greater flexibility when you begin to take your retirement benefits.
Tax on Death
Most DC schemes now pay the benefits on your death to your nominated beneficiaries – either as a lump sum or as income payments. If you leave your DC pension in the UK, your beneficiaries can receive any such payments free of tax in the event of your death before age 75. On death after this age, they would pay tax at their marginal (highest) rate.
A QROPS will mirror the pre-75 UK rules for a UK resident and, on death after age 75, there could be no UK tax payable under certain circumstances. On the face of it, this makes a QROPS look attractive as it appears that you may be able to avoid UK tax. However – and this is an often misunderstood point – everything depends upon where the beneficiaries are resident at the date of death. If they are not UK resident, then all death benefits may be potentially taxable in their country of residence regardless of whether death was pre or post age 75.
Where will your Pension and its underlying assets be held?
To ensure further protection for your pension fund, whilst your retirement scheme is administered in Malta, the investments will typically be held within a ‘bond’ or ‘wrapper’ (investment platform) with some of largest life assurance companies based in the Isle of Man. Of all the major offshore centres, the Isle of Man is one of only a few that has a statutory compensation scheme for life assurance companies, thus being one of the most secure locations globally. The compensation scheme is a result of the Isle of Man Life Assurance (Compensation of Policyholders) Regulations 1991.
This protection scheme is regarded as a safety net for policyholders to claim for compensation in the unlikely event that the company becomes insolvent. The compensation scheme offers investors up to 90% of the policy value.
UK Inheritance Tax (IHT)
There is no IHT payable on UK pension funds because pension funds do not form part of your estate. This remains unchanged should you decide to transfer your UK funds to a QROPS.
In our Netherlands office, we will provide you with the expertise to guide you into making the right decision when transferring your UK pension both from a local and UK perspective.