Overseas Pensions – QROPS & QNUPS
With more and more people retiring abroad, transferring UK pension benefits overseas is becoming increasingly common. But is this right for everyone?
Whilst there can be many advantages to moving UK pension benefits overseas, it is not right for everyone and individual financial advice is always needed as some UK pensions will include guarantees which will be lost on transfer.
It sounds a simple question; should I transfer my UK pension benefits into an overseas pension, a QROPS or QNUPS, perhaps? (Qualifying Recognised Overseas Pension Scheme / Qualifying Non UK Pension Scheme.)
However, the answer is never simple because as with so many things, it is personal circumstances and the type of pension benefits you have that will dictate the answer.
Before being able to decide whether a transfer overseas is appropriate, it is vital to fully assess and understand the benefits that could be provided from the current UK pension scheme.
Final Salary or Defined Benefit Pension Schemes?
If you worked for the Civil Service, Emergency Services, NHS or were a Teacher, the pension benefits associated with these employers are established on a defined benefit or final salary basis. The same applies to many other occupations with larger employers. Although many schemes have been closed over more recent years, if you have benefits in this type of arrangement you need to consider them very carefully.
The basis of providing benefits is by reference to the period you were employed and your final pensionable salary (which may be different to your actual final earnings). Typically you will be guaranteed a pension for life, which will escalate during payment and will in all probability, include a dependent spouse’s pension which becomes payable on the death of the member. If you have not yet drawn on the pension, you will also be entitled to commute part of the pension into a lump sum. Take care here though; what is described as a tax free benefit in the UK, may in fact be taxable overseas.
If you were a member of one of the Government schemes, your benefits may well be taxed in the UK still when you draw them and not where you then live, even if you have moved overseas and are no longer a UK tax resident.
There are swings and roundabouts with this but as a result, you could still receive your lump sum without any tax applying but pay more tax on your pension income than would apply were you to transfer your pension to an overseas scheme. However, a cautionary note: not all schemes will allow you to take a transfer value.
For many people, the guaranteed benefits are the most important feature and should be preserved at all costs. For others however, the flexibility a transfer can offer may be more attractive or even more relevant to their circumstances.
Just one final point in regard to final salary schemes, you may also have been paying AVCs into a stand alone arrangement – AVCs are additional voluntary contributions. If you were, you may be able to deal with these separately from the main scheme and you might even decide to draw the main benefits from the UK scheme and transfer your AVCs to an overseas pension.
Personal Pensions, Self Employed & Defined Contribution Pension Schemes
For many people though, they will not have had the good fortune to be included in a final salary pension. The alternative arrangements are known as defined contribution schemes and could be linked to an employer or be structured as a personal pension or self employed pension.
The emphasis here is placed on making contributions and for these to accumulate to provide a fund value which in turn can be used to provide pension benefits in retirement. Once again, a lump sum can be taken and the UK limit is up to 25% of the fund value which is payable without deduction of UK tax. However, tax may be due in your country of residence. The balance of the fund can then be used to provide retirement income.
The income can be drawn from the fund or if guaranteed income is required, the fund can be used to purchase an Annuity, which is a contract designed to provide a guaranteed income for life or a specific period.
For some, these guarantees are important, but many view Annuities as poor value for money as they are affected by life expectancy and long term gilt yields. The former has been increasing and the latter reducing – the combination has conspired to reduce the level of income available from Annuities.
However, some older UK pension policies will have guaranteed annuity rates built in and are a contractual right. Some contracts could have guaranteed rates which will provide pension income at a level substantially higher and perhaps even double that which is available in the open market today. But care is needed here as well because the guarantees may only be available at specific dates and in a prescribed form which may prove too restrictive.
This is only scratching the surface of what is a complex area and decisions should not be rushed.
Our recommendation is that you should consult with RAFP as we have the professional training, experience and ability to understand your UK benefits. We are able to explain the various benefits and guarantees to you and provide a detailed comparison with what you would gain or lose by transferring overseas.
Only then can you make a truly informed decision about whether a transfer is right for you.