UK Pension Transfers: QROPS and SIPPs for Expatriates
Find out how to make a UK pension work if you move to Cyprus, with information on the Self Invested Personal Pension and Qualifying Recognised Overseas Pension Schemes...
In the mid-2000s some significant reforms were introduced to the UK pension system by HM Revenue and Customs (HMRC). The changes were introduced to make pensions simpler to understand, easier to invest in and more beneficial for people to take control over their own personal pension provisions. The average age of the UK population is increasing, putting strain on the standard pension provisions that have been established by the UK Government.
Many people who have worked in the UK before moving abroad have more than one "frozen" pension. They may have been paying into their own personal pension scheme or schemes and also have additional company plans from previous employers. On taking up residency elsewhere in the world it might be possible to move existing pension provisions out of the UK (depending on the type of pension) and amalgamate them to provide more control over where the money is invested.
Self-Invested Personal Pensions (SIPPs)
A SIPP (Self Invested Personal Pension) is a personal pension which allows the member of the SIPP a much broader range of investments, compared to a traditional personal pension. Investment opportunities might include commercial property, land, overseas property funds, residential property funds, quoted and unquoted shares, trusts, unit trusts and Open Ended Investment Companies.
A SIPP can give the member the opportunity to invest their funds (including Protected Rights) in any HMRC permitted investments which do not attract a tax charge. The member also has the option of using their fund (including Protected Rights) in borrowing calculations.
Note that when investing Protected Rights in a private pension, the Protected Rights fund is "ring fenced", so that the investor is able to identify the Protected Rights money.
A SIPP provides investment freedom but also maintains the significant tax advantages of a pension. It also provides greater flexibility in the way benefits may be taken in retirement. A person may retire at any age between 50 (age 55 from April 2010) and 75 with no penalties. Up to 25 percent of the value of the SIPP investments can be taken as a tax free cash sum while the remainder remains invested.
Qualifying Overseas Recognised Pension Schemes (QROPS)
QROPS is a pension scheme established outside of the UK which may accept pensions transferred from UK schemes. In order to receive and maintain approval from HMRC a scheme must fulfil the following criteria:
- Be regulated in the country where it is established
- Be recognised for tax purposes in the country where it is established
HMRC allows a United Kingdom expatriate to remain a member of their UK pension schemes providing the scheme rules and trustees allow it. There are no residence restrictions for tax purposes on members of UK registered pension schemes.
Alternatively, a UK expat can consider transferring their pension funds to an overseas arrangement. Transfers out of UK registered pension schemes are tested against the lifetime allowance (LTA) and any amounts transferred above the lifetime allowance are subject to a tax charge of 25 percent. Transfers below the LTA will not attract a tax charge on transfer, providing the overseas scheme is a Qualifying Recognised Overseas Pension Scheme (QROPS).
Transfers to an overseas pension scheme that is not a recognised QROPS will be treated as unauthorised payments and subject to tax charges.
- A list of authorised QROPS is available on the UK Government website
Eligibility and advantages for a QROPS
Any person who has left - or is in the process of leaving - the UK permanently is eligible for an approved scheme.
UK pension schemes are heavily regulated and the authorities impose many restrictions on how those schemes can operate. For expatriates, former UK residents (including non-UK nationals who have frozen pension benefits in the UK) and persons leaving the UK on a permanent basis, the transfer of their UK pension to a QROPS can permanently remove many of the restrictions that exist under UK legislation and can be significantly more tax efficient in a number of ways. QROPS are exempt from European Savings Tax Directive reporting requirements.
QROPS provides a great deal of flexibility in terms of the range of investments available. Members are subject to the rules of the scheme and terms of the trust deed. Payment of benefits at retirement would be subject to those rules.
Under current legislation, if a member has been resident in the UK at any time during the past five tax years receives a payment or deemed payment of benefits from the QROPS, this payment must be reported to the UK authorities by the Trustee or administrator of the scheme. After ten tax years that requirement to report ceases.
Transfers can be made from most types of UK pension scheme providing the scheme allows this. It is not possible to transfer a UK state pension into a QROPS.
A transfer from a UK registered pension scheme to a QROPS is regarded as a "benefit crystallisation event" so the transfer must be tested against the individual member's lifetime allowance. The testing of an individual's lifetime allowance against the value of a transfer can be complicated and appropriate financial and tax advice is recommended. Transfers in excess of an individual's lifetime allowance may be subject to UK taxation.
Disclaimer: QROPS transfers are not appropriate for everybody and anyone contemplating transfer of a UK pension to a scheme outside of the UK should take independent financial and tax advice. The information contained herein is a general summary and does not constitute tax, investment or legal advice. No responsibility is accepted for any errors contained in this guide.