Once you reach retirement age you need to carefully consider all your options for your UK pension funds, and how they affect your retirement income and the transfer of any balance to your heirs on death. British expatriates have the further option of Qualifying Recognised Overseas Pension Schemes (QROPS) to consider, and need to take the local tax implications into account.
Retirement planning is an essential component of your new life here in Portugal. You need to be armed with all the facts and thoroughly review what you have to enable you to make the best overall decision for your personal situation. Seek specialist advice before you start drawing your pension or transfer any funds.
All UK pensions are bound by UK rules and remain so even if you are no longer resident in the UK.
Even with QROPS, you still need to pay close attention to UK pension rules and HM Revenue & Customs (HMRC) guidance. Getting it wrong could prove very costly.
QROPS were introduced in 2006 on the back of EU directives on pension harmonisation. Over the years HMRC has got much stricter. Today the QROPS market provides less choice and more complexity than many people realise.
QROPS are not a one-size-fits-all solution for expatriates. You need to weigh them against your other pension options and understand how the regime affects you. It is vital that you understand the rules that apply when transferring pension savings overseas.
HMRC explains that the primary objective of the QROPS regime is to enable Britons who have permanently left the UK to simplify their affairs by taking their pension savings with them to their new country of residence. This enables them to continue to save to achieve a higher income when they retire.
Where HMRC deems that its rules have been broken, it can apply a 55% tax charge of the amount you transfer.
After acknowledging that its original rules were unclear, the tax authority recently said it will not raise or pursue any assessments arising from transfers into QROPS before 24th September 2008. The exception is where there is evidence of dishonesty, abuse, or artificiality.
HMRC has also now provided guidance aimed specifically at individuals considering a transfer into a QROPS.
The guidance warns:
“In particular it is not considered desirable for individuals to be able to use a transfer to an overseas scheme to facilitate the withdrawal of their savings as a large lump sum or to receive more tax relief than would have been available had the pension savings remained in the UK.”
If a scheme does not meet the requirements to be a QROPS, transfers into that scheme will be subject to tax charges. Where schemes offer tax loopholes or the opportunity to receive a large lump sum, tax charges of 55% of the amount you transfer (not the amount you receive) can easily arise.
The guidance points out that there are important rules about how the scheme should operate in its own country and individuals should know that the rules are being followed. A letter from HMRC with a QROPS number is not confirmation that the scheme is or will remain a QROPS.
HMRC advises: “You should get independent professional advice and confirm with the scheme that it meets the requirements to be a QROPS before agreeing to the transfer.”
It is clear that HMRC is reinforcing the message that the weight of responsibility rests on the shoulders of the individuals and their adviser for ensuring the QROPS they are transferring to satisfies HMRC’s conditions.
A QROPS may still be the best solution for you, but it is just one option to consider and it depends on your specific situation. You need to be confident that you do not break or twist any rules, and receive reliable, compliant and up-to-date specialist advice. This advice must take the UK rules, those of the QROPS jurisdiction and the Portuguese tax regime into account.
UK pensions and pension transfers are heavily regulated in the UK by the UK Financial Conduct Authority (FCA). Even if you are no longer UK resident, it would be advisable to have an adviser who is FCA authorised and regulated, and is capable of carrying out the in-depth analysis of existing arrangements in order to advise you whether to QROPS or to not to QROPS… for an expatriate with existing UK pensions, that is the question!
Summarised tax information is based upon our understanding of current laws and practices which may change. Individuals should seek personalised advice.
Blevins Franks Financial Management Limited is authorised and regulated by the Financial Conduct Authority in the UK, reference number 179731. Where advice is provided outside the UK, via the Insurance Mediation Directive from Malta, the regulatory system differs in some respects from that of the UK.
Written by Gavin Scott, Senior Partner, Blevins Franks