+ Larger Font | + Smaller FontIn recent years, UK nationals have increasingly been looking beyond the UK both for employment opportunities and a place to retire.
Several million UK nationals already live overseas and research by the Institute of Public Policy Research estimates that whilst one in twelve Britons of UK pensionable age currently live abroad, they predict that this will increase to nearly one in five by 2050.
In addition, a survey from the insurance provider RIAS found that about 10% of the UK's over-50 population are "seriously considering" a move to another country and data from the Office for National Statistics suggests that 400,000 people in the over-50 age group are already planning to emigrate.
Almost 25% of British pensioners overseas live in Australia, whilst Canada (15.2%) the USA (12.7%), Ireland (10.1%), Spain (7.2%), New Zealand (4.5%), South Africa (3.7%), France (3.3%) and Italy (3.3%) make up the eight other top retirement destinations for British retirees.
With the number of British pensioners living abroad predicted to increase to one in five by 2050, the impact on a UK national’s pension benefits should they move abroad is therefore, unsurprisingly, becoming an increasingly important area for consumers to understand.
What are the options if you do retire abroad?
There are three options that you can consider for your UK pensions schemes:- Leave it where it is
- Transfer to a Self Invested Personal Pension (SIPP)
- Transfer to a Qualifying Recognised Overseas Pension Scheme (QROPS)
Self-Invested Personal Pension (SIPP)
- A SIPP is a UK based pension arrangement governed by UK pension legislation.
- It is your own contract, in your own name, and you are 100% in control of its strategy.
- Capital and income can be accessed from age fifty five (2010). At this time, it will be possible to provide a lump sum of 25% tax free and depending on where you are inn the world a tax free income via a double taxation agreement.
- The other real advantage of the SIPP is in the extent of the investment choice, meaning you can invest in a very wide range of asset types.
- A SIPP costs are based on fixed amounts to the higher the amount the lower the costs of the scheme. Most insurance based schemes are based on a percentage value, so as fund grows, the cost increases as well.
- An offshore investment bond is used as the platform for currency control and open architecture investing.
- Qualifying Recognised Overseas Pension Scheme (QROPS)
- A QROPS is a Qualifying Recognised Overseas Pension Scheme that meets certain HMRC requirements.
- Generally, a QROPS must behave as if it were a UK pension for investors who have been UK resident in the previous five tax years. Also, if an individual returns to the UK, the QROPS will become subject to UK pension regulations.
- However, for investors who have been non UK resident for at least five tax years, the QROPS becomes subject to the laws of the overseas jurisdiction in which it is based (in our case Guernsey).
- Consequently, you can take income with no limits and there will be no deduction of tax at source although taxation will apply in accordance with your new country of residence
- Following death any remaining fund can be paid as a tax free lump sum to the nominated beneficiaries. Legislation contained in the Finance Act 2008 corrects an error in the original legislation passed in 2004. The effect of this change is to give freedom from UK IHT on death after transferring a UK pension fund to a QROPS.
- The schemes use an offshore investment bond for the platform to construct the portfolio for currency control and open architecture investing.
Other Factors to consider
UK Taxation
If you leave your benefits in the UK then over and above your entitlement to tax free cash the rest will be paid net of basic rate UK tax (currently 20%). If you elect for no tax free cash, all of the pension will be taxed at 20%.
Inflation
Even in the perceived low inflation years of the last decade, it is commonly believed the real cost of living (forget government indicators like RPI or CPI) has doubled. In other words we pay twice as much for everything now than we did 10 years ago.
Irrespective of any technical pension analysis, frozen pensions incremented by Limited Prices Increase (RPI or 3% which ever is less) over the coming years are going to be wiped out by the inflation washing through the system over the next 5 - 10 years, courtesy of the recent monetary expansion by the Fed in the US & the phenomenon known as Quantitative Easing, courtesy of the Bank of England in the UK. So what will the real value of your pension be at retirement date?
Currency
Whether transferring abroad or taking benefits from a UK scheme, consideration should be given to fluctuations in currency values – especially if the currency in the new country of residence is relatively weak or volatile.
For example, if someone is retiring abroad and the currency in the new country of residence is weak compared to the pound, it may be better not to transfer and take the benefits from the UK pension – especially if the country in question has a DTA with the UK.
There are a number of key factors in the selection of the right QROPS:- Where is the scheme located? We only use the Channel Islands at the moment due to the European directive on pensions. Other locations around the world have seen there status as QROPS provider removed from the HMRC list e.g. Singapore. The result is a 55% tax on the scheme.
- How long has the scheme been around? A proven track record in administering the pensions, not only on the initial transfer but also the ongoing reporting to the HMRC and local authorities is essential. The rules have changed over the course of the last few years and a provider who has experience in this is invaluable.
- How much does it cost? Some of the QROPS costs are far too expensive for the amount of benefits that you receive, often running into thousands of pounds. We expect the cost to come down to SIPP levels over the next few years.
The difference between a QROPS and a SIPP
The table shows the different tax considerations of QROPS in Guernsey and the IOM in comparison against a SIPP and what the HMRC rules are across the world.
As you can see there is no real significant advantage to a QROPS over a SIPP for tax purposes before you start to take benefits.
| SIPP | HMRC Rules | QROPS Guernsey | IOM | ||
|---|---|---|---|---|---|
| Maximum TFC at retirement | 25% of fund value | 70% of transfer value for income | 25% of fund value | 30% of fund value | |
| Tax on income | UK tax but consider DTA | Gross | Gross | 18% IOM tax but consider DTA | |
| Tax on death | Pre vesting | 0% | 0% | 0% | 7.5% |
| Post vesting | 35% | 0% | 0% | 7.5% | |
| Post 75 | up to 82% | 0% | 0% | 7.5% | |
| Income levels | Pre vesting | 0% | 0% | 0% | 0% |
| Post vesting | 0-120% GAD | Justifiable | 0-120% GAD/ justifiable | Actuarial | |
| Post 75 | 70-120% GAD? | Justifiable | 0-120% GAD/ justifiable | Actuarial | |
So what about the costs?
We have completed extensive research into the different QROPS providers in the market and at the moment the biggest disadvantage we can see is set up and ongoing cost. The market is very similar to the SIPP market a decade ago, and we expect these costs to drop over the course of the next few years.
As there are no real significant advantage to a QROPS over a SIPP before you start to take benefits. Therefore, given the current increased costs of setting up a QROPS, a SIPP is in general a more viable option. The below table shows the typical cost of a SIPP Vs QROPS
| Fees | SIPP | QROPS |
|---|---|---|
| Set Up Fee | 295 | 995 |
| Annual Fee | 250 | 995 |
| Benefit Fees | ||
|---|---|---|
| Calculation fee | 145 | 0 |
| Transfers out | 250 | 0 |
| Regular Income Payment | 145 | 0 |
| Annuity purchase | 145 | 0 |
| Death benefits | 500 | 0 |
Overall the cost of the SIPP is far cheaper than a current QROPS. If over a 5 year period you can see how much this difference is.
| 1st | 2nd | 3rd | 4th | 5th | Total | |
|---|---|---|---|---|---|---|
| SIPP | 545 | 250 | 250 | 250 | 250 | 1,545 |
| QROP | 1,990 | 995 | 995 | 995 | 995 | 5,970 |
This can add up on the smaller amounts and for the extra cost there is no actual added benefit.
Both the SIPP and the QROP can use an offshore investment bond as the platform for the investments so the cost of this is comparable. When you come to transfer the scheme from a SIPP to a QROP the investments do not need to be cashed in but are transferred as an inter specie transfer. This means the investment strategy does not need to be changed when the structure is changed. The cost of this would be £250.
Summary
Unless you are about to retire and take your pension then a SIPP would certainly be a better alternative than a QROPS at the current time. Until the costs come down to a reasonable comparison the option is very clear.
Frozen Pension Review Service:
Please take advantage of a free, no obligation review with one of our recommended, independent pension advisers. During which they can discuss some of the various options open to you.
