Beware overseas pensions
People moving abroad can take their pension assets offshore with qualifying recognised overseas pension schemes (QROPSs). These arrangements have been in the news recently as a tax mitigation device at a time when public concern about tax levels is rising.
The big advantage of QROPSs is that, once five years have elapsed after a scheme has been set up and the investor has been registered as a non-UK resident, the arrangement is free from UK regulations and tax.
This means pension benefits can be paid gross, which could significantly boost your pension income in a low-tax regime, such as those of Malta and Cyprus.
Death benefits from QROPSs are more tax-efficient than they are from a UK pension. The fund will be returned on death without an unauthorised payments charge or inheritance tax liability, although estate charges in the country of residence may apply.
This compares favourably with a UK pension, where current rules force people to buy an annuity by the age of 75 (or pay a tax penalty on death), so that nothing is left to pass on to heirs.
But it's not as easy as that...
One major problem people retiring abroad face is currency risk. A QROPS can be invested in non-sterling assets, mitigating the conversion risk involved in receiving a pension in sterling when day-to-day outgoings are in another currency.
Currencies can move against each other dramatically - in the past three years, the value of sterling has fluctuated by more than 30% against the euro.
Transferring to a QROPS is not a step to be taken lightly. They are expensive and not generally recommended for funds of less than £200,000.
According to Graham Barnes, international director at The Fry Group, typical set-up costs are around £1,500, plus an annual charge of £1,000 to £1,500 payable to the trustees, and that's before the chosen asset manager deducts annual management fees.
Some advisers like to sell QROPSs for the wrong reasons. For example, a QROPS will put an adviser in a position to advise on a client's pension assets, wherever they currently live or move to, and until the Financial Services Authority's retail distribution review comes into effect on 1 January 2013, advisers can still take upfront commission on the underlying investments.
Make sure your scheme qualifies
Another concern with QROPSs is that in some cases HM Revenue & Customs has revoked QROPSs' qualifying status. In September, members of the Beazley Consulting Pension Scheme in Hong Kong discovered that they could lose 55% of their savings, after the scheme's status was revoked. This will consist of an unauthorised payment charge of 40% and a 15% surcharge.
Even more disconcerting, the latest QROPS list, published by HMRC on 3 September, includes a scheme about to lose its approval, so even HMRC's list is not a definitive guide.
Barnes says such cases occur because a few schemes have broken the fundamental rules of pensions, by allowing 100% cash commutation, for example, while some wait the statutory five years and then start to bend the rules. "It needs to be a pucker pension, in a jurisdiction with proper pension regulations and be on HMRC's list," he says.
"I have some sympathy with the Revenue on this. A pension is tax-free on the way in, and then you generally take the income taxed at source, but people are trying to take the income out tax-free."
Most advisers suggest you only take out a QROPS if you expect to become a non-UK resident within 12 months. "QROPSs absolutely make sense for people genuinely planning on retiring abroad and who want to retain control of their pension outside the UK's tax system," says Tom McPhail, head of pensions research at Hargreaves Lansdown.
"For anyone who might have been contemplating using a QROPS, even though they were planning on staying in the UK, there are a couple of reasons to think again. HMRC is clamping down on anything that smacks of avoidance, and UK pension investors deliberately moving their savings offshore is not the kind of thing it finds amusing."
Transfers from personal pension schemes and final-salary schemes (defined benefit) are permitted, but the latter may be inadvisable. If you are a member of a final-salary scheme, you will need to factor in potential benefits, such as a widow's or widower's pension and guaranteed future increases in line with inflation, which will mount up.
This article was originally published in Money Observer - Moneywise's sister publication - in November 2010
The practice of locating your financial affairs (banking, savings, investments) in a country other than the one you’re a citizen of, usually a low-tax jurisdiction. The appeal of offshore is it offers the potential for tax efficiency, the convenience of easy international access and a safe haven for your money. However, offshore is governed by complex, ever-changing rules (such as 2005’s European Union Savings Directive) and, as such, is the exclusive province of the wealthy and high-net-worth individuals.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).