If you are a British citizen who is living overseas, you may be frustrated by the fact that your pension money is tied up with the rules and regulations of the government. Your pension funds seem to be frozen in the red tape set up by the UK government. When you can access these funds, they are heavily taxed by the HMRC and are paid in pounds, which may not be a favourable currency in the country where you are currently living. The British government has made some changes that now make it easier for expatriates to access the money in these funds. If you have money that is in a UK pension and are living overseas as a British expatriate, you can now transfer your pension funds into a Qualified Recognised Overseas Pension Scheme, or a QROPS. A QROPS allows you to withdraw your pension money and put it in the other fund without paying the taxes you normally would pay on pension withdrawals, provided that at least five complete tax years have passed since you were residing in the UK. You can then withdraw money from the QROPS in another currency, without paying the pension income or inheritance taxes.
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What are the benefits of putting your funds in a QROPS? The most obvious benefit is the ability you will have to use your money without paying the high income taxes imposed by the government. You can also take out some money when you make the transfer to use for your current needs. Because QROPS funds that are structured properly are shielded from taxes, you can pass on some of your money to your beneficiaries without forcing them to pay high UK inheritance taxes. When you put your funds in a QROPS, you will never be required to purchase an annuity, as you would if your funds were still in the UK pension. Many countries where you can set up a QROPS provide protection from creditors as well, allowing you to save your income for your future needs or your children's inheritance, even if you are currently facing financial difficulties. You also may find that there are better returns on QROPS funds. When you invest in UK pension plans, you may find that your money is mostly invested in UK assets. When you invest your money overseas in a QROPS, you have more options for your investments. By diversifying your investments, you can increase your potential gains.
So what is the catch to using a QROPS? First, you have to find a pension scheme that is approved by the UK government. This is not difficult, but you will want to talk to a financial advisor or lawyer to make sure that you are doing everything correctly. This will not be a free service, so there is some cost involved with setting up a QROPS. However, the savings you will receive from the fund will far outweigh the cost of hiring a lawyer, if you have enough money in your pension to get one of the better QROPS pension funds. You will also need to pay for annual management of your account. The amount this will cost depends on the account you choose, but it can add up to a significant amount over the life of your fund. Make sure that you are working with a financial advisor to ensure that you are not paying more than you should for the management of your funds. Keep in mind, too, that different QROPS funds perform differently. Some are more risky than others, and some bring better returns than others. Before switching your funds to a QROPS, make sure that you stand to benefit from the transfer.
Now, UK pensioners can access more of their pension pot earlier and have greater control over how their pension income is paid and what they can invest in.
However, taxation may now be even higher as Brits will likely take higher incomes which could mean paying higher taxes at the higher marginal rate (i.e. paying up to 45% rather than just 20% tax) on their pension income and there is still a tax upon death of 55%, although this may be lowered to 40% or the marginal rate.
In fact the Inland Revenue are banking in this increasing tax coffers by 3 BILLION GBP over the next five years.
British expats with large pensions can protect themselves from tax upon death and UK income taxes by transferring to a Qualifying Recognized Overseas Pension Scheme (QROPS), although this isn't for everyone and you need to contact a financial specialist to conduct a transfer analysis to see if it suitable or not.
(1) Flexible Drawdown - The minimum 'secure pension' requirement for UK flexible drawdown will reduce from £20,000 per annum to £12,000 per annum. This will allow a greater number of retirees flexibility in how they draw their pension benefits.
(2) Trivial Commutation - For eligibility purposes, the maximum sum of UK pension wealth will increase from £18,000 to £30,000. This allows individuals with limited pension provision to draw their benefits as a lump sum from age 60. The 25% Pension Commencement Lump Sum ('PCLS') allowance which is not subject to UK tax applies and the balance is taxable at the recipient's marginal UK income tax rate.
(3) Trivial Commutation of Small Pots - The limit for the trivial commutation of small occupational pension scheme funds will increase from £2,000 to £10,000 per pot. The number of small occupational pensions that may be commuted is unlimited. In addition, the number of personal pension pots that may be taken under these rules will increase from two to three. As above, 25% of this will not be subject to UK tax and the balance is taxable at the recipient's marginal UK income tax rate.
(4) Capped Drawdown (Income) to Increase by 25% - The maximum annual capped drawdown pension will increase from 120% of the UK Government Actuary's Department (GAD) rate to 150%. That means you will get a larger annual income per year from your pension, although it will also deplete your pension pot quicker.
Proposed changes from April 2015
(5) Flexible Defined Contribution/Money Purchase Benefits - expat investing The rules are to be simplified so that anyone with a UK Defined Contribution pension (a final salary or company pension scheme) will be able to draw their entire pension fund as and when they wish from age 55. There will be no minimum income requirement in order to qualify. The 25% PCLS allowance will remain and the balance of the lump sum will be taxed as income at the individual's marginal UK income tax rate. The option of using the pension fund to purchase a pension annuity or to enter into Capped Drawdown will remain.
(6) Lower Taxes on Your Pension Upon Death Proposed - At the moment, if you have a pension and die whilst drawing benefits, there is a 55% tax charge upon death. There are suggestions that this is to be reduced and may be in line with the 40% inheritance tax rate upon death.
(7) Restrictions on Transfers from Public Sector Pensions Out to SIPP/QROPS - The government intends to introduce legislation to restrict transfers from Public Sector Pensions to Defined Contribution schemes, except in undefined limited circumstances. They are concerned that the new rules may provoke a significant outflow from public sector pensions to more flexible Defined Contribution schemes.
As most Public Sector pensions operate on an unfunded basis (not to be confused with 'underfunded'), this would create an immediate cost to the exchequer.
(8) Possible Restrictions on Transfers from Private Sector Defined Benefit Salary Related Pensions - The Government is concerned that the proposed changes may prompt a significant outflow from Private Sector Defined Benefit pensions to Defined Contribution pensions. They believe "this could have a detrimental impact on the wider economy". To counter this they have put forward the following proposals:-
• To prohibit Defined Benefit to Defined Contribution pension transfers unless there are exceptional circumstances.
• Continuing to allow Defined Benefit to Defined Contribution transfers provided the current more restrictive Defined Contribution regime applies post transfer.
• Placing an annual cap on Defined Benefit to Defined Contribution pensions
• Allowing transfers to Defined Contribution schemes at the scheme trustees discretion
• Not placing any restrictions and offering Defined Benefit scheme members full flexibility
The Government is seeking feedback from industry stakeholders on these proposals and the practical implications of any changes.
(9) QNUPS - The budget briefly mentioned QNUPS and plans to consult on measures to reduce its effectiveness to avoid IHT. We await further detail on this measure although expect QNUPS to remain a useful planning tool provided used for retirement purposes.
(10) Increased Minimum Pension Age - It is proposed that the minimum pension age will increase to 57 by 2028 and rise in line with state pension age increases thereafter.