Should I transfer my UK pension to a QROPS or a SIPP?
Your pension is one of your most important financial assets. Any decision to transfer it, should not be taken lightly. As an expat who has worked hard for your money. The most devastating thing would be to see your ideal future up in smoke because of one poor decision. Particularly if you can get an overseas enhancement to the lifetime allowance.
Here is a real-life story of a global citizen, just like you, who managed to turn his finances around in the nick of time. Most British expats have been called by an army of financial salespeople. You have probably been given unsolicited advice around the "best thing" to do with your pension (or the best products to invest in). The salespeople sound friendly, well practiced and drop in buzzwords around alleged tax savings. It's why so many people are falling for their tactics. Our client, an engineer based in Kuala Lumpur, was one of them.
He came to us for a second opinion about his anxiety around keeping the future lifestyle he wanted. This included a QROPS valued at £800,000. At the time, his previous 'adviser/salesperson' recommended he and his wife transfer into two individual QROPS schemes. His pensions had been structured as a QROPS, with an underlying portfolio bond as the platform (a portfolio bond is a tax wrapper, so is a QROPS or SIPP). Having a tax wrapper within a tax wrapper can complicate financial plans. In this case, it made him liable to unnecessary charges. These opaque charges funded the commissions of the salesperson. Moreover, the QROPS was expensive and ineffective. Our client now lives in the UK, so it would potentially make sense to move his pension back to a UK-based, low-cost SIPP. However, we recommended a different solution - for him to retain the QROPS wrapper for the following reasons:
- Since our client planned to retire abroad, it was more beneficial to retain his QROPS status, as it allowed him to pay out a pension income or capital in different currencies.
- He could draw his pension income free from UK income tax when he retired outside of the UK.
- If he lived outside the UK long enough, he could draw a higher tax-free initial sum of 30% in retirement, as opposed to 25% (SIPP).
- He was in his early 50s and by the time he reached his expected retirement age of 65, he would've grown to exceed the lifetime allowance of £1.073 million.
- If he transferred his pension back to a UK SIPP, he would be taxed 55% on amounts that exceed £1.073 million.
- Finally, he had limited capacity to make future contributions to his pension and obtain tax relief, as he was no longer working.
We advised him to retain his QROPS status and transferred him to a lower cost, far higher quality provider. After which, we introduced a low-cost platform and removed the unnecessary bond tax wrapper. We rebalanced his portfolio through a low-cost, evidence-based strategy. Reducing his ongoing charges by 3.48% per annum (or saving £27,840 based on a value of £800,000), whilst substantially improving his long-term investment performance. Perhaps far more importantly, our review allowed for the crafting of a tangible financial plan and investment policy to address our client's anxiety and focus on his most cherished goals. Backing this robust lifetime investment plan with cashflow projections and a highly supportive, professional service. This was of inestimable value as it prevented the plan from blowing up at some fleeting moment of market or emotional stress.
Remember, there could be many potential solutions for you depending on your circumstances. Transferring your overseas pension is a huge decision. So, make sure you understand exactly what pension you have and its unique implications. It's safe to assume that at least 90% of your personal lifetime investment returns will be driven by (a) the primacy of a documented financial plan (b) how much of your investments are sensibly allocated to equities as opposed to bonds and (c) whether or not, in response to an extreme market fad (BitCoin), or fear (COVID-19 crash), you break faith with your plan. Salespeople don't discuss planning because they are paid by focusing your attention on the product.
What's the difference between QROPS and SIPPs - and should I transfer my pension?
You may have friends or colleagues who have transferred their pension into a SIPP or a QROPS - and perhaps you are wondering whether you should do the same. Here are the differences and various pros and cons to help you decide.Pensions get quite technical, and the personal circumstances around your pension and retirement needs are unique. So, do seek expert help from a qualified, professional advisor before taking any action.
What is a self-invested personal pension (SIPP)?
SIPPs are UK-registered personal pension schemes. They are defined contribution schemes (meaning only the contribution you make is defined - there is no guaranteed level of income at retirement). They are generally funded by an individual, and abide by UK legislation with regards to tax, and when and how they can be accessed. SIPPs have become very popular in recent years, driven by their relatively low cost - and the wide investment choice they offer. It's important to remember though, that SIPPs are UK-based, so if you are living abroad the advantages of using them can be limited.For example, pension contributions in the UK to a UK-registered scheme receive tax relief of at least 20% per year. However, if you live abroad and are paying into a UK-based scheme, tax relief will only be available for the first five tax years of your non-UK residence and you will also be subject to a cap of £3,600 per annum. Like all UK pensions, SIPPs received a boost a few years back when new rules came into effect providing people with fully flexible access to their defined contribution pensions (including SIPPs). This flexibility simply means people can decide for themselves when and how they take their pension income, after the age of 55.
A myth surrounding Qualifying Recognised Overseas Pension Schemes (QROPS)
First, a quick piece of myth busting, and a little warning to make sure you don't fall foul of UK pension rules. A myth wrongly and often perpetuated by people who promote qualifying recognised overseas pension schemes (QROPS) is that a scheme has received approval from HM Revenue & Customs. They may refer to it as being an "authorised" or "approved" QROPS.This is completely untrue. The reason people choose to refer to them like this is for one of two reasons - ignorance or intentional deception. If someone uses these words to describe a QROPS, while trying to convince you to transfer, be extremely cautious. QROPS are also sometimes sold as a way to simply empty a UK pension, "tax free". If HMRC believes UK tax-relieved pension assets have been accessed improperly or invested in ways it doesn't permit, you could face a substantial tax charge.
What is a QROPS?
QROPS are actually very similar to SIPPs, as they are defined contribution schemes, but they are based outside the UK. They can be based in any country around the world, and qualify as a QROPS as long as the scheme meets specific requirements set by HMRC. As mentioned, HMRC does not vet individual schemes - the scheme trustees notify HMRC of their existence and self-certify that the scheme meets the criteria. After this, the scheme will normally become "recognised" by HMRC, and will often (but not necessarily) be included on a list published on its website.
QROPS are intended for people who are planning to, or have already left, the UK.
The main difference between a SIPPs and a QROPS is the additional tax benefit a QROPS may bring to those living outside the UK.
QROPS and the lifetime allowance
One of the biggest benefits of QROPS is around something called the lifetime allowance (LTA). Under current UK legislation, you can only accumulate a tax privileged pension fund of up to £1.073 million, unless you apply for certain types of protection which can boost this to higher levels in some circumstances. This means pension savings above the LTA may be taxed at up to 55%. However, if you transfer your pension into a QROPS, it is tested against the LTA at the point of transfer, and not again thereafter. This means, if the value of your UK pension fund is close to the LTA, it may be worth considering a transfer into a QROPS to avoid being taxed on your pension savings above the LTA in the future.
"Should I transfer my UK pension?"
As well as understanding what SIPPs and QROPS are, it is vital that you understand the benefits of the type of scheme you currently have.
There are two types of UK pension scheme - defined contribution and defined benefit.
Defined benefit schemes are colloquially known as "gold-plated pensions." They provide scheme members with a pension that is intended to be guaranteed. These schemes are becoming rare due to their cost - and if you have one, you should think very carefully before transferring from it. It is also now required - by law - that anyone considering a transfer from a defined benefit scheme worth more than £30,000, including into an overseas scheme such as a QROPS, must have taken financial advice from an advisor qualified to provide UK pension advice. Such an advisor has to be authorised by the Financial Conduct Authority.
7 things to keep in mind if you're contemplating a pension transfer:
#1. Spring Budget 2017: QROPS changes
On the 9th March 2017, some significant overnight changes occurred to pensions legislation, the most dramatic of which relates directly to those who wish to transfer their UK pension benefits to an overseas scheme, such as a QROPS. In summary, there is now a 25% tax upon transfer, levied at source by the UK trustee, unless one of the following conditions is satisfied:
- Both the individual making the transfer and the QROPS are in the same jurisdiction treating the EEA as a single jurisdiction for this purpose.
- The QROPS is a scheme in which the individual's employer participates, and the employer is a multi-national.
This means that in some circumstances a QROPS is no longer a realistic option. It can also mean that additional specialist tax advice is required to determine whether a transfer is feasible.
#2. What will my spouse and children get when I die?
With a defined benefit scheme, the death benefits provided to your spouse and children can be relatively poor. In some cases, especially if your children are older, you may find they receive nothing. By transferring into a defined contribution scheme - either a SIPP or a QROPS, you may be able to leave much more to your family when you die. In addition, it may be possible for the fund to "cascade" from one generation to the next.
#3. Is my pension fund near the LTA?
As mentioned above, breaching the lifetime allowance could see your pension subject to high taxes. It may be worth considering moving your scheme overseas to avoid this happening. A QROPS may be suitable in this case.
#4. How much tax will I pay on my income?
UK pensions are taxed, and in some cases, it may make sense to move your pension to a QROPS in the country you are living in, or to a "third party" QROPS jurisdiction. This depends on the terms of any double taxation agreement (DTA) between the country where your pension income comes from, and the country in which you are living. Claiming double taxation relief can be complicated, and if your pension income is paid from the UK, it may result in a procedure to reclaim tax deducted at source. The purpose of a DTA is to prevent pension (and other) income being taxed twice. But if there is no DTA in place, you could end up being taxed twice - in the country in which you are living, and where your pension is based. It is therefore of paramount importance that you take specialist tax advice on this point.
#5. How will currency impact my pension income?
Currency is something that must be carefully considered. You may be able to exchange pension income into another currency, but the timing of an exchange could have a material impact on the size of your pension. Also remember that if your pension is paid from the UK, and you are living abroad, you will need to factor in an exchange to a local currency when working out your income.
#6. I have a defined benefit scheme and would like to begin drawing my pension early, is this possible?
It's generally possible to move the retirement date if you have a defined benefit scheme - this is set by the rules of the scheme, but subject to the minimum pension age set by the UK government, now 55. But, taking your pension earlier than the scheme pension age will normally bring with it quite a substantial reduction in pension. However, if you transfer the pension into a defined contribution scheme, such as a SIPP or a QROPS, you will be able to begin withdrawing income from age 55.
#7. Will my pension savings perform better if I consolidate into a QROPS or SIPP?
It's very common for people to have multiple pensions from time spent working at different companies, all with different schemes. It may make sense for you to consolidate your pensions to reduce costs and make your pension portfolio work more efficiently. Knowing whether to transfer your pension is arguably one of the biggest financial decisions of your life, and so it must only be done after taking advice from a fully qualified advisor.
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