QROPS or SIPP – How to Know Which One Will Maximise Your Retirement Income
If you’re moving overseas, do you HAVE to move your pension too?
The short answer is, no.
The helpful answer is, it largely depends on how much money you’ve got in your pension pot, what type of pension you have, where you’re moving to, whether you plan to return to the UK and a whole host of other questions that a qualified International Financial Adviser will need answers to before giving you definitive advice.
What would happen to a UK private pension if the pension holder moves overseas?
Nothing will technically happen to your UK pension if you move overseas. The terms of your pension will remain the same. That’s not to say your money will not be impacted if you move overseas – or if you draw down on it whilst living overseas.
For example, if you leave the UK and continue to contribute to your pension, you will only qualify for tax relief on your contributions if you lived and paid taxes in the UK during that tax year, or you’re classed as a “Relevant UK Individual”.
But who’s a relevant UK individual when they’re (not) at home?
A UK-relevant individual for tax purposes is someone who is either a UK resident or a UK citizen who has been living abroad for less than five years and has UK taxable income. This is according to the five-year rule outlined in the Royal London for Advisers website, which states that if someone moves overseas, in the year they leave the UK, maximum tax relievable contributions will be 100% of their UK earnings in that tax year or £3,600 if greater. For the next five tax years, they can still make pension contributions of up to £3,600 a year and get tax relief. But what happens when the five years is up? And is an allowance of £3,600 enough for you?
What happens if you draw an income from a UK pension whilst living overseas?
If you live abroad and receive a pension from the UK, the UK government may tax it as UK income. In addition, if your new home country doesn’t have a double-taxation agreement with the United Kingdom—and many don’t!—you might also be taxed there. Nobody likes a double-tax whammy.
Meanwhile, your pension provider might not be willing to make payments into an overseas bank account, or they might charge fees to do so—so you may need to have payments made to a UK bank account instead. But don’t forget to factor in currency fluctuations, as a weakened pound could leave you vulnerable to value losses.
When it comes to managing your pension as an expat, it pays to speak to a financial adviser who specialises in expatriate financial planning. They’ll be able to offer tailored advice and help you make the most of your UK pension. (Funnily enough, that’s just what we excel in – so feel free to say hello!)
What are the options when it comes to transferring your UK Personal Pension?
If you move abroad and want to move UK private pension too, it’s not as simple as packing your suitcase and taking your pension with you. The process is one you cannot feasibly undertake without getting expert financial and retirement planning advice from a qualified adviser.
If, after lots of fact-finding and seemingly endless questions, your FA thinks it’s the best plan for you to take your pension out of the UK and invest it in an overseas scheme, there will be two options available to you: A Qualifying Recognised Overseas Pension Scheme (QROPS) or an International Self Invested Pension (iSIPP). Which one is best for you comes down to a variety of circumstances.
All about QROPS
A Qualifying Recognised Overseas Pension Scheme (QROPS) is a type of pension scheme that allows individuals to transfer and consolidate their UK pension(s), including frozen pensions, into one. It is designed for those who are looking to transfer their UK pension abroad and offers potential tax advantages and access to a broader range of international investments.
QROPS must meet certain conditions as prescribed by HMRC, the UK tax authority, and must comply with the laws of the country in which it is based. The pension scheme must also provide certain benefits, such as a minimum level of death benefits, to qualify as a QROPS.
There are a number of qualifying conditions that HM Revenue & Customs (HMRC) has set out, including:
- The member must be at least age 55 before receiving retirement benefits from the pension scheme.
- The scheme must be accessible to people who are resident in the country where it is established.
- The trustees of the QROPS must comply with HMRC reporting requirements. (See below section about reporting requirements).
What are the benefits of a QROPS?
The main benefits are:
- The potential to take 30% of your pension as a lump sum without tax penalty at age 55, compared to 25% from a UK pension
- No Compulsory Annuity Purchase
- Reduction in Currency Risk
- Greater choice of investment options
- No Lifetime Allowance Pension Cap
- UK Inheritance Tax breaks
Transferring your UK pension into a QROPS will give you access to investments across the world and allows for contributions and drawdowns in various currencies, making them particularly attractive to overseas retirees. Furthermore, since a QROPS does not fall under UK jurisdiction the proceeds of your pension value won’t be considered part of your estate – which makes for straightforward inheritance and estate planning.
What are the potential drawbacks of a QROPS?
When a pension scheme is recognised as a QROPS, and you make a transfer to it, this means there will be 10-year reporting period where the pension provider must inform HMRC regarding any payments made to you or your dependents. This may leave you liable for UK tax charges (of up to a hefty 55%) if you break one of the rules, like drawing down your pension before age 55, or transferring your pension to another scheme.
There may be further drawbacks associated with transferring your UK pension to a QROPs, including:
- You may be subject to the HMRC Overseas Transfer Charge of 25% – but most people manage to avoid this so long as either the scheme is within your new resident country or both the scheme and your resident country are in the EEA
- Potentially high fees – (though we would usually recommend that people with large pension pots and the potential for coming up against the Lifetime Allowance take out a QROPS, so any fees are generally offset against massive tax savings);
- Potential exposure to tax liabilities in your country of residence;
- Regulation of QROPS comes down to the individual country – which could leave you with more or less protection than you had with your UK pension;
- Your QROPS scheme could potentially be delisted – and you should speak to your IFA about what this could mean for you.
You can find out more information about QROPS by taking a look at our previous blog.
What about an iSIPP?
The alternative to a QROPS is an international Self Invested Personal Pension (iSIPP). There are SIPPS available in the UK, but for expats looking to transfer their pension overseas, there are international options that are available. An international SIPP allows you to transfer and/or consolidate your UK-registered pensions in a new country of residence, while still enjoying the protection offered under UK regulations.
A SIPP is a pension scheme that allows you control over where your pension fund is invested and the ability to manage your risk and investment portfolio.
The benefits of an iSIPP
Compare to typical workplace pensions, a SIPP can offer you:
- Greater flexibility and control
- Investment opportunities in stocks, bonds, real estate and other assets;
- Giving you control over how much and how often you contribute;
- Invest in riskier assets with potentially much higher returns;
- Tax efficiency – freedom from capital gains and income tax on your investment growth;
- Tax relief on your contributions if you’re a UK taxpayer;
- Freedom from capital gains tax or income tax on your pension investment growth.
An offshore or international SIPP allows you to diversify your investment portfolio into a wider range of assets, including foreign stocks, bonds and real estate. You can also take advantage of currency fluctuations when investing in a currency other than Sterling.
An international SIPP can be more flexible and portable than a QROPS – particularly important if you move around or return to the UK. Not only are you free from worries about the OTC (Overseas Transfer Charge), because iSIPPS are UK-based schemes, but you have more flexibility when transferring back to the UK.
iSIPPs are designed to be relevant to the currency you’re earning in (or will eventually spend in retirement), so you can move the capital to either GBP or another major currency if there’s a risk of it being undervalued. iSIPPs are FCA-approved and safe. Furthermore, you can invest your funds in a wider range of assets, so this can stimulate growth faster than a UK pension.
Are there any drawbacks of an iSIPP?
The main drawback of an international SIPP, when compared to a QROPS, is that it doesn’t offer protection from the LTA. This means if you have an especially large pension pot, a SIPP might not be right for you.
As with any investment, returns are not guaranteed – you may get out less than you put in, and all the other disclaimers we have to remind you of. SIPPs tend to fluctuate wildly but result in long-term growth. The good news is that most iSIPP providers offer a range of investment options to choose from, so you can pick the ones that fit your risk profile.
While fees for iSIPPs tend to be lower than those of QROPS, there are still fees – but you may also be able to lower fees by shopping around.
We’ve also blogged more in-depth just about SIPPs – take a look at our bog about whether expats can grow retirement wealth with a SIPP.
So, is it QROPS or iSIPP for the win?
Our usual advice to our clients is that the decision is largely based on pension value.
Pension pots worth under £250,000 are, in most cases, best placed in an international SIPP. This is because you are unlikely to face issues in the near future regarding the LTA, and the annual charges for an international SIPP are generally on the lower side.
Once we’re looking at pension pots valued over £250,000 the waters are a little murkier. If you are younger and still have lots of earning potential left and time to accumulate a large pension fund, then you may still be affected by the LTA and could consider a QROPS. If you’re approaching retirement in the near future, you will likely be fine with an iSIPP.
Once we’re looking at pension pots over half a million Sterling, people of any age are most likely to be concerned about the LTA and taxes of between 25% and 55% of the excess. So a QROPS is most likely to be worth the extra in fees for protection against this.
Residency matters when choosing between QROPS and iSIPP
Where you’re living also determines the best option for you. We’ve already mentioned that QROPS can be subject to the OTC—the big, bad UK taxman’s efforts to spoil all the fun! The introduction of the OTC has made life a lot harder for QROPS hopefuls, applying a 25% tax charge on transfers when certain exclusions aren’t met.
If you’re transferring to an employer’s scheme or to a pension in a country where you’re also a resident, you’re in luck. The OTC may also be less of a headache if the scheme and the resident country are both in the European Economic Area (EEA). However, if your pension scheme and resident country are different, and either is NOT part of the EEA, you’re likely to be best served by an iSIPP, irrespective of pension value. This is because transfers outside of the EEA would be subject to the OTC of 25% of the total pension value.
Unless your pension value is especially large, you are most likely to end up better off by taking the LTA hit on the excess than 25% of your entire pension value. There are, of course, exceptions to every rule – and the very best way to know whether a QROPS or SIPP present the best opportunity for you to maximise your retirement money will come down to careful investigation and planning by an IFA.
Find out how much of your pension you could transfer, and whether it would be worth doing so. If you’re considering a QROPS or SIPP, get in touch with us today.
What our clients have to say about our pension transfers advice
“I moved to Chris from my previous offshore advisers who seemed to have lost interest in me. Since joining Chris my faith in the industry has been restored and I am confident that my pension and investments are in the right hands going forward. Maxi has been exceptional in helping sort out the administration with my pension trustees who are not always the easiest to deal with!”
Zak, UK
“I wanted to pull all my UK pensions together to make them easier to administer and manage the investment side of the portfolio. I approached Chris to do this and I have been very happy with the results. Five different schemes were pulled together with the minimum of fuss and the investment performance and communication through the unprecedented market circumstances concerning both COVID and BREXIT have been excellent. Everything was processed online and Maxi handled the paperwork side with great efficiency. I am very happy with my decision to utilise Chris’s experience and knowledge and look forward to using him long into the future.”
Chris, Canada
“I wanted to transfer my pension from the UK. At first, I had a feeling of trepidation about using an online adviser. Chris and Maxi not only delivered a faultless transfer but the performance of my funds since has been first class.”
Mark, Canada
