In 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 while 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, while 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 the age of 55. At this time, it will be possible to provide a lump sum of 25% tax free and depending on where you are in the world, a possible 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’s operative costs are based on fixed amounts and for investments, usually the higher the value of the pension, the lower the costs of the investment. Most insurance-based schemes are based on a percentage value, so as the fund grows, the cost increases as well.
- An offshore investment bond is commonly 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 enabling it to receive and hold transfers from UK pension funds (UK Relevant Transfers) without the application of a tax charge on the transfer (subject to the Lifetime Allowance).
- Generally, income from a QROPS be treated 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 again and act like a SIPP.
- 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 conditional on certain restrictions imposed by HMRC on investments and benefits (required to enable the scheme to hold a UK Relevant Transfer)
- Consequently, you can sometimes take income with different limits to a SIPP and although taxation will apply in accordance with your new country of residence and, where no double taxation agreement mitigating it, the country providing the pension.
- Following death, conditional on the 5 year rule, (and local pension rules) 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 commonly use an offshore investment bond for the platform to construct the portfolio for currency control and open-architecture investing.
Other Factors to consider
If you leave your benefits in the UK then over and above your entitlement to tax-free cash the rest will be paid in accordance with the UK HMRC Pay As You Earn system, though any income tax liability may be mitigated if income is less than the personal allowance (current £8,105), or where you live in a country with a double taxation agreement allowing the income to only be taxed in your country of residence. A professional tax adviser or your financial adviser will be able to help you consider your personal residential circumstances when this becomes applicable.
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 – usually final salary schemes – are usually incremented by Limited prices increases (RPI or 5% whichever is less). Over the coming years this may be wiped out by the inflation washing through the system over the next 5 – 10 years, courtesy of the recent monetary expansion by the US and 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?
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 British 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? This is an important decision to be made and many variable factors will affect the correct jurisdiction for your circumstances
- How long has the scheme been around?A proven track record in administering the pensions, not only on the initial transfer but also the on-going 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
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, and after you have, it will be relative to your residency status for tax purposes and the country in which you actually retire (by retire, we mean take benefits).
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 on-going 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. There is 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.
Overall the cost of the SIPP is far cheaper than a current QROPS. Both the SIPP and the QROPS 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 in-specie transfer (which means the assets can be re-registered to the receiving scheme, conditional on them being able to receive it). This means the investment strategy does not need to be changed when the structure is changed.
SIPP Vs QROPS?
Unless you are about to retire and take your pension then a SIPP would nearly always 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.