Qualifying Recognised Overseas Pension Schemes
A transfer to an overseas scheme from a UK pension fund can only be done if the scheme has registered to be a Qualifying Recognised Pension Scheme (QROPS). For this they must satisfy various caveats, such as it must be recognised as a pension scheme in the country where it is based, the benefits are subject to taxation, amongst others.
The scheme also undertakes to report to the UK Inland Revenue any payments out of the scheme. If any payments are made which would not have been allowed in the UK (a lump sum greater than 25%, or income greater than that allowed in the UK, or benefits are accessed earlier than age 50) then there will be a tax charge levied by the UK Inland Revenue of up to 55%.
This requirement to report to the UK Inland Revenue is only applicable if you have been a UK resident in either the current or any of the previous five tax years.
There are several French pension schemes which have registered to become QROPS, but at present there is little flexibility with these funds, since benefits can only be elected at State retirement age, and an annuity must be purchased.
It is possible though to transfer to an “offshore” pension scheme.
What are the advantages of offshore pensions?
A transfer to an offshore scheme could enable your pension fund to be euro-denominated, and therefore provide income payments in euros.
An offshore scheme may offer greater control of the fund, and the potential to pass funds to your children.
It may also offer the possibility of greater income than the UK.
What are the disadvantages of offshore pensions?
There are question marks over how the French tax authorities might treat these pensions – if the funds can be accessed, are they liable for Wealth tax? Are they still viewed as pension schemes, and therefore does any income receive the 10% abatement?
If the schemes offer access to the whole fund, or provides “tax-free” income, technically these schemes are not operating within the “spirit” of the rules, and the QROPS approval may be withdrawn, and there may be taxation consequences. In fact, The Inland Revenue has shown recently an intention to pursue individuals who abuse the rules, and one case in February for example, involved the Revenue pursuing a tax payment from an individual on a fund of less than £50,000.
Whilst the limit on any withdrawals will be dependant on the jurisdiction where the scheme is based, in France you are taxed on your worldwide income, and therefore whilst the scheme may determine a payment as “tax-free”, the French authorities may take a different view.
Historically, offshore pension funds have also had more costly and complex charging structures, and as transferring pension funds abroad is not regulated by the FSA, you may not be afforded the same protection if things go wrong. It may also not be possible to transfer the funds back if you return to the UK.
What are the options if my benefits remain in the UK?
In the UK, there are two methods of providing an income: annuity purchase and unsecured pension.
With an annuity the fund is exchanged for a guaranteed income, payable for life, which once started, cannot be changed or altered. Annuities are suitable for people who want a secure income, and do not require control over their pension fund.
You do not have to buy any annuity at any time.
The alternative is where an income is taken directly from the fund – this is called Unsecured Pension. This offers several advantages – you retain control of your fund, there are greater options for your spouse in the event of your death, and you can always buy an annuity if your circumstances change and require a secure income.
Unsecured Pension is not suitable for a lot of people though, since it provides an income which is not guaranteed, and you can end up with a decreasing income.
Previously an annuity had to be purchased by age 75. Now however you can continue with a form of Unsecured Pension, called Alternatively Secured Pension, which offers many of the same benefits of Unsecured Pension, but with one or two restrictions.
If Unsecured Pension is suitable for you, then the structure of a Self Invested Personal Pension (SIPP) might be of interest.
A SIPP is a type of Personal Pension. With Personal Pensions, your contributions or transfers are invested in whatever funds have been chosen. A SIPP is a “wrapper” in which there is a trustee bank account which acts as the control centre. It is from here that income is paid, and investments are bought and sold.
It is possible to have a trustee bank account which is euro denominated, but the majority of SIPP providers are not able to accommodate this. We have however negotiated with specialist SIPP providers to enable the SIPP bank account to be euro denominated for our clients.
This means that a UK based pension fund can hold (and pay income in) euros, and if an appropriate euro-denominated investment is held, your entire plan is euro denominated, which removes any currency risk to your income.
Transferring a pension fund abroad : Summary
The option of transferring a pension fund abroad will be suitable for some people, but you should consider whether the potential benefits outweigh the risks. There are options within a UK structure which may achieve your goals, and these retain the option of transferring offshore in the future once the treatment of these funds becomes clearer.