Finance Act 2004 introduced new rules, effective from April 2006, for the transfer of UK pensions to overseas pension schemes. The aim is to allow expatriates to re-home their pensions where they are now resident.
However, an unauthorised payment charge on the member can only be avoided if certain rules are followed, hence the term “qualifying” in the name. These rules aim to ensure the overseas pension broadly follows UK legislation. In brief, these rules state that the member must:
1. Currently be a member of a personal or occupational pension fund, and not have bought an annuity
2. Have been or expect to become non UK resident for a minimum of 5 years
In addition, the scheme into which the transfer is intended to go must be recognised by HMRC as meeting the requirements of Finance Act 2004. If successful, it will be accorded QROPS status and be listed on the HMRC register of approved overseas schemes.
Some of the potential benefits for expatriates in transferring to a QROPS are:
· The pension payments will be paid in the local currency, avoiding exchange risks
· The local tax rates may be more favourable
· No compulsion to buy an annuity
· There may be the option of drawing tax-free lump sums
· Residual pension may pass to heirs tax efficiently
· The link to the UK is broken
· There may be greater choice of investments.
· Choice of currency and investment holdings
It is a requirement of a QROPS that the trustees of the scheme report to HMRC for a period of 5 years following transfer, during which time the scheme must stay as a qualifying scheme. Thereafter, the QROPS provider is under no obligation to report any actions such as withdrawals or payments to the UK tax authorities.
Given that a QROPS presumably wishes to remain registered with HMRC, there is little scope for actions within the QROPS that do not broadly meet UK pension rules. However, once the 5 year conditions have been observed in full, the member could transfer to a non-qualifying pension scheme. The reporting obligations would then not apply unless the scheme member is (a) resident in the UK when the payment is made (or treated as made), or (b) although not resident at that time, has been resident earlier in the tax year in which the payment is made (or treated as made) or in any of the five tax years immediately preceding that tax year. This non-qualifying pension scheme might offer the opportunity for greater cash payments, or investment into non approved areas such as residential property
Remember that any tax payable on pension income will be determined both by the regulations of country of residence of the QROPS and the member's country of residence (if different from the QROPS).
Don’t miss next month’s issue when I will be covering the risk of QROPS.
By Robert I Fraser