Brendan Harper, technical services manager at Friends Provident International, examines the potential pension problems for UK nationals living overseas
Figures produced by the Institute of Public Policy & Research have shown around one in 10 British nationals are now living overseas.
Unlike many expatriates in the past, the research also suggests that the majority of those who live abroad now intend to stay abroad.
When individuals consider moving abroad, especially those who have a family, it is easy to overlook UK pensions when planning the move. However, not paying attention to this could prove costly at a later date.
Most types of UK source income in the hands of non-UK residents are exempt from UK tax, with the exception of UK pension and rental income. This means that a non-UK resident drawing a UK pension will be subject to UK tax. As highest marginal rate of tax is 40%, it is worth considering if this can be mitigated or avoided.
Fortunately, if you move to a country that has a double tax treaty with the UK that includes a provision on pensions, then it is normally possible to have the pension paid without deduction of UK tax. This includes most of the popular retirement destinations in Europe, as well as Australia and the US. It is always worth checking individual treaties, as many older treaties do not contain a provision on pensions. Good examples of this are the treaties with the Isle of Man and Channel Islands.
If you can receive a pension income without UK tax deducted at source, then you could be better or worse off, depending on where you decide to retire - for example France has a much higher maximum tax rate than the UK, whereas those who choose Cyprus can enjoy a 5% tax rate on their UK pension income.
It might well be that one could consider transferring a UK-registered pension to a qualifying pension scheme in the new country of residence.
For a foreign pension to be eligible to accept a transfer, it must be a qualifying recognised overseas pension scheme (QROPS). The requirements for a scheme to be a QROPS are summarised as follows:
1The scheme is established in a territory where there is a body that regulates pension schemes and that body regulates the scheme, and the scheme is recognised for tax purposes.
2A scheme is recognised for tax purposes if:
a. It is open to persons resident in the territory where it is established, and
b. Members either receive tax relief in that territory in respect of their contributions, with corresponding taxable benefits, or no tax relief on contributions with corresponding tax free benefits
c. The scheme is recognised by, approved by, or registered with the relevant tax authorities of pension schemes in the territory in which it is established, or
d. If no system exists for the approval or recognition or registration of pension schemes in that territory:
i. It is resident there, and
ii. Its rules provide that at least 70% of a member's tax relieved scheme funds will be used to provide an income for life, and
iii. The pension benefits payable to the member do not become payable any earlier than the minimum retirement age in the UK
In addition to the above:
3It is established in an EEA country or in a territory that has a tax agreement with the UK that contains a provision for the exchange of information and non discrimination, or
4The scheme rules state that at least 70% of the fund value must be used to provide an income for life, and the benefits are not payable earlier than the minimum pension age in the UK, and the scheme is open to residents of the territory in which it is established.
As you can see, the rules are very complex, and it might not always be obvious whether or not a particular foreign scheme is capable of qualifying to accept a transfer from a UK scheme. One point worth noting though is that many EEA schemes can qualify for transferability even where there is no compulsion to buy an annuity (for example, in Ireland). It's also worth mentioning that a UK scheme can be transferred to a QROPS even if the member has not moved abroad.
Care needs to be taken before an individual considers a transfer to a foreign scheme, as there are other issues to consider, namely:
•The new scheme may not provide for a tax-free lump sum, or one that is lower than the 25% available in the UK scheme
•The transfer will be a benefit crystallisation event
•If the individual comes back to the UK, they may be stuck with a scheme bearing higher tax rates than the UK top rate, as well as payments in a currency other than sterling
•The new scheme will have to register with HMRC and provide certain information, such as notifying it when a payment is made to the member
•It is HMRC's view that, where a non-UK pension plan receives a transfer value from a UK plan, it will be classed as "relevant property" for UK IHT purposes. This means that there will be a potential liability to the IHT-10 year and exit charges, as well as a liability to IHT on the pension fund on the death of the member.
•The member may remain subject to certain UK tax charges in respect of the "tax relieved" portion of their fund, namely:
i Member payment charges
ii Taxable property unauthorised payment charge
iii Lifetime allowance charge.
FCA consultation response
MoneyLens to be edited by former Mail on Sunday journalist Vicki Owen