If you have built up a UK pension fund and now are no longer UK-resident, or intend to become non-resident, you may not realise that your pension is still subject to UK taxation rules. You might have moved abroad to escape the UK, but if your pension has not, it is still subject to UK pension rules and restrictions.

Before 2006, it was generally only possible for a person to transfer his or her UK pension to an overseas pension scheme located in the person's new country of residence. Modernisation and simplification of UK pensions legislation in 2006 removed this restriction. This not only enables an individual to freely transfer a UK pension overseas, it also therefore gives choice over where to transfer a UK pension.

WHAT IS A QROPS?

Qualifying Recognised Overseas Pension Schemes (QROPS) are special overseas pension schemes which satisfy rules and regulations laid down by UK legislation. The Finance Act 2004 made it possible, from April 2006, for UK pensions to be transferred to any overseas pension scheme which is registered with HMRC as a QROPS.

If a QROPS member has not been out of the UK for five complete tax years, the QROPS will closely mirror the UK system and will report any payments made to a member to Her Majesty's Revenue and Customs. After this initial period, the reporting requirements fall away and the QROPS will follow the regulations of the country in which it is based. In many cases, those regulations are less restrictive than in the UK.

WHAT ARE THE BENEFITS OF A QROPS?

If you have a UK pension scheme, and you have been (or will be) UK non-resident for at least 5 years, there are a number of possible reasons to consider transferring your UK pension to a QROPS:


If you are no longer UK-resident for tax purposes, you will certainly not wish for UK or other tax to be deducted at source from your pension. Guernsey based QROPS meet this requirement: provided you are not a Guernsey resident, your QROPS pension is paid to you free of tax. You may have a liability to tax on your pension in your own country of residence, depending upon your personal situation.


If you transfer your UK pension into a QROPS, at retirement - which is when you decide (between the ages of 55 and 75) - you can take a tax-free lump sum of up to 25% of your fund. This could be used, for example, to pay off a mortgage, to fund the purchase of a major asset, or to reinvest outside of the pension structure.


Even if you have left the UK, your UK pension continues to be subject to UK tax laws and restrictions if it remains in the UK. In this respect, the UK Government "will not allow the pension tax rules to be used ... to allow the inheritance of ... pension savings". For this reason UK tax law bears heavily upon UK pension schemes: any attempt to hand a UK pension fund down to family or other beneficiaries on death can attract combined UK income tax and inheritance tax charges of up to 73%.

QROPS however are non-UK pension schemes. Transfer of a non-resident member's pension fund on death to another family member does not attract the same penal UK tax charges applicable to UK pension schemes.


If you have a UK personal pension or other defined contribution pension scheme, your UK pension fund will normally have to purchase a pension annuity in retirement. This means that you exchange your accumulated pension fund for an annual pension income which ceases on your death (or in some cases on the death of your spouse). Annuity rates are based on gilt yields, which are historically low at present (2009-10). QROPS, in contrast, have no annuity requirement. If you transfer your UK pension to a QROPS, your fund before and after retirement remains invested exactly the way you want it. Pension is payable to you by drawdown of income and capital from your pension fund. You never, ever, have to buy an annuity. And unlike an annuity, your pension fund does not die with you.


QROPS offers the widest possible investment choice. Investment management can either be self-directed by the member or delegated to an investment manager appointed by the member. You are able to choose from a range of investments, ranging from equities and bonds to commodities and alternative investments. This enables you to match your pension investments to your own risk profile, preferences and objectives.


If your pension remains in the UK, the fund will be invested in Sterling based assets. If you have become used to another base currency, this may no longer be appropriate. For example, if you intend to remain in Asia, a US Dollar based pension may be more appropriate. If you retire to Spain, you may wish your income to be in Euros. Most QROPS will allow you the freedom to make such a choice.


If you have a number of UK Pension schemes, these may be consolidated into a single QROPS. This simplifies administration and may offer the opportunity to reduce total pension charges.


The EU savings directive provides for the deduction of tax, or exchange of information, in respect of interest earned in member states by residents of other member states. Both the Channel Islands and the Isle of Man are parties to this agreement.

Interest earned by investments within a QROPS is not subject to this tax treatment.


Income and capital gains arising from the investments held within the Plan, or benefits paid by the Plan, are not subject to UK tax. This means that a QROPS provides a very efficient tax free environment in which your pension assets can grow.

SOME MISCONCEPTIONS


QROPS legislation is entirely clear on this subject. At least 70% of the value of the transfer must be used to provide a pension for life. If this rule is breached, the QROPS trustees will jeopardise their approved status and the scheme member will be subject to a tax charge of 55% of the value of the withdrawal.

The QROPS provider must also follow the legislation of its own country. Guernsey, for example, limits the payment of a lump sum on retirement to 25% of the fund value.


If a loan is advanced by a QROPS, the debt becomes an asset of the fund and is defined as "taxable property". As such, it will be subject to a tax charge of up to 55%.


Residential property is defined in the legislation as "taxable property". If a QROPS purchases taxable property, the value of the purchase will be subject to a tax charge of up to 55%. Other examples include antiques, jewellery and fine wines.

The tax charge applies irrespective of how long the member has been non-resident.