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What you need to know about transferring your pension abroad

Transferring your pension abroad can be a good way to escape the UK tax net but be wary about schemes claiming to allow you to take all your cash tax free.

 

by Michelle McGagh on Jun 20, 2012 at 12:54

What you need to know about transferring your pension abroad

A sun-soaked retirement is the dream of many people and there are lots of companies who promise to help you avoid tax on your pensions by transferring it abroad.

But before you hand over your pension pot to any overseas company you must be aware of the rules around Qualifying Recognised Overseas Pensions (Qrops) and how they work.

What is a Qrops?

A Qrops is effectively an international pension. In 2006 HM Revenue & Customs said that UK residents who were planning on leaving the country and planning to retire abroad could transfer their pension into a Qrops – an international pension – based in the country they are planning to retire to. In other words you have to become a non-resident in the UK for tax purposes.

The main benefits of transferring a Qrops is that you avoid UK tax on your pension. In the UK when you take your pension you are entitled to take out a 25% tax-free lump sum but all the income you take after this, either through an annuity or through drawdown, is taxed as income.

Pensioners are still entitled to a personal allowance each year but any income over that is subject to the normal income tax rates of 20% up to £34,370, 40% up to £150,000 and 45% on income over £150,000.

Many of the Qrops that are available are based in countries that have more attractive income tax rates and some countries don’t tax pension income at all or allow pensioners to take large tax-free cash lump sums.

For example, in Cyprus pensioners can pay a fixed flat rate of income tax of 5% per year on all income over a personal allowance or they can chose to increase their personal allowance and pay a higher rate of income tax.

What tax benefits are there?

The major tax benefit is that your pension income is taxed under the rules of the country you transfer your pension to.

This may mean you can take more tax-free cash, that you avoid capital gains tax on pension investments or that you even avoid inheritance tax. Some countries allow pension funds to be invested in areas which the UK government does not allow, meaning more scope for returns but also for risk.

The tax breaks you get will depend on the scheme and where it is based.

Sounds too good to be true?

Qrops promising you can take your entire pension fund out tax free are too good to be true – but that doesn’t stop them from making those promises.

HMRC has very strict rules about the Qrops that you are allowed to transfer your money to.

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14 comments so far. Why not have your say?

Swiss Gnome

Jun 20, 2012 at 22:13

Be very very careful about the transfer to off shore scheme providers, we have discovered what started in Guernsey and after moving from several ' allegedly' non competent trustees the funds were for most of the members transferred to Cyprus: we resisted this and were charged £300,000 fees but we managed to stay in the Channel Islands. This is now becoming a matter for review by the GFSC, HRMC and the police.

However the administrator has taken many of the members funds to Cyprus, put into a Tanzania registered bank (no independent stats available as yet) and has appointed trustees in the Seychelles Islands where there is little regulation and no requirement for directors names to be registered for companies.

Feel comfortable we didn't? Perhaps if you are concerned about your pension pot and you think you are in this mess watch the financial press over the next few months.

Alternatively you think you have been caught up in this scheme speak to the last trustees before it went off shore to Cyprus, ask them for details of other aggrieved ex-members. It won't cost you a penny but might well save you considerable 'fees!'

This is just the start our legal team are now well into the case.

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Roy England

Jun 21, 2012 at 10:34

One of the best articles I have read summarising QROPs.

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tim boles

Jun 26, 2012 at 10:45

Extremely good article- but it seems to have been written before HMRC's new rules that came into force wef 6 April

eg the 5 year reporting deadline is now 10 years- my notes below might be helpful

HMRC have made it clear that whilst they do not stand to gain (tax wise ) from the changes it brings the whole concept back into the old fashioned approach of pension planning; and it was clear that HMRC were getting fed up with some of the extravagant claims and misuse that had been going on.

This should not prove a surprise to the pension industry as it only serves to regularise pension operations across the world into the same pension regime. Namely in order to obtain tax relief on contributions wherever given, tax must be charged on pension benefit withdrawals in whichever jurisdiction the pension is registered and administered.

Pensions are not about avoiding taxation they are concerned with deferring taxation, HMRC does not favour jurisdictions installing a 0% tax on pension benefit withdrawals from schemes that have received tax relief on the contributions on the way in from HMRC before they became QROPS and moved jurisdictions.

The situation regarding the different treatment of residents from non-residents by QROPS jurisdictions is explicitly mentioned so as to remove any qualifying differentials:

Guernsey worked very hard on a solution (the 157E); and must have been very disappointed when HMRC ruled that out as well,

HMRC has set out to erode jurisdictions’ ability so as to enact what they consider deleterious legislation by retaining the possibility of subsequent exclusion (from the list of QROPS) with clause No. 2.69, which states that any country or territory which "makes legislation or otherwise creates or uses a pension scheme to provide tax advantages that are not intended to be available under the QROPS rules" would find such schemes "excluded from being QROPS”.

Perhaps the most obviously compliant approach to this is the one taken by the Isle of Man with their Treasury 1989 Income Tax Approved Manx pensions – which withhold 20% tax on residents and non-residents alike but which is offsettable 100% against income tax in countries with which the Isle of Man has a Double Taxation Agreement or equivalent. These now number 17. Those considering the attractions of QROPS might be well advised to research the third party countries that hold DTAs with the providing jurisdictions and where there is a match (with the anticipated country of retirement) select accordingly.

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Anonymous 1 needed this 'off the record'

Jun 26, 2012 at 13:13

Tim Boles - Thank you for your comments. Any thoughts re: Gibraltar please?

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Dewi Montgomery

Jun 26, 2012 at 14:23

If I were Swiss Gnome I would be happy to have stopped the transfer to Cyprus of his fund even though it looks as some unscrupulousness trustee / administrator may have deducted outrageous fees. I also would suggest that he prepares papers for the GFSC and even HRMC as there appears to be something very wrong with going to a state which is self is begging for handouts from the EU again. Banks which are shadowed in secrecy and away from regulators who have teeth.

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Dewi Montgomery

Jun 26, 2012 at 14:27

Swiss Gnome I have had a similar situation and the am now in contact with other aggrieved members looking to take a class action. Cyprus, shadowy banks & Seychelles trustees, good bye pension?

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tim boles

Jun 26, 2012 at 14:57

Hi Anonymous

I was asked the same question by the FT the other day- and I have to say that my Gib knowledge is out of date...............at the moment

Anyway I told Jo the same thing- my advice would be to read the article (by Jo Cumbo on June 2/3) since others commented on GIB forthcoming QROPS.

If the fees are high and the deal seems too good to be true (ie zero tax and huge payouts) then it probably IS too good to be true and should be avoided!

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Anonymous 1 needed this 'off the record'

Jun 26, 2012 at 21:50

Thank you Tim Boles. I have read the article which is all right as far as it goes. It says that Malta is likely to become the destination of choice but doesn't say why? For example, it does not indicate the rate of tax to be deducted by the Maltese.

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Swiss Gnome

Jun 27, 2012 at 01:32

Anonymous 1.

What is happening is that HRMC are looking at the legitimacy of QROPS schemes and their members and how the fund managers are manipulating the country location of the schemes to stay ahead of any possible changes.

What appears to be the model of certain providers now is to open several schemes in other countries to operate simultaneously. So if, as in the case as with Guernsey recently where they (HRMC) removed the QROPS status of 300 schemes, they ( fund managers) will switch the funds to another jurisdiction such as Malta, Gibraltar or Cyprus to stay ahead of the revenue.

One particular such scheme, which requires a minimum investment of £1 million and currently under investigation, is doing this and taking enormous fees from the members accounts for arranging the transfers. The management has moved off-shore with little chance of being pursued by the members,

Be very careful, aggrieved members are having their funds syphoned and placed in countries where there is little regulation. This is a big worry.

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Swiss Gnome

Jun 27, 2012 at 01:32

Anonymous 1.

What is happening is that HRMC are looking at the legitimacy of QROPS schemes and their members and how the fund managers are manipulating the country location of the schemes to stay ahead of any possible changes.

What appears to be the model of certain providers now is to open several schemes in other countries to operate simultaneously. So if, as in the case as with Guernsey recently where they (HRMC) removed the QROPS status of 300 schemes, they ( fund managers) will switch the funds to another jurisdiction such as Malta, Gibraltar or Cyprus to stay ahead of the revenue.

One particular such scheme, which requires a minimum investment of £1 million and currently under investigation, is doing this and taking enormous fees from the members accounts for arranging the transfers. The management has moved off-shore with little chance of being pursued by the members,

Be very careful, aggrieved members are having their funds syphoned and placed in countries where there is little regulation. This is a big worry.

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tim boles

Jun 27, 2012 at 09:01

You are far better off IMO having your pension in a properly regulated jurisdiction that is fully HMRC compliant

-Such as the Isle of Man- with its own pensions regulator the IPA- which has recently shown to have teeth

Bet you can't guess where our pensions business is located? Apologies for being partisan! But the facts do stack up

Anonymous1

I would rather have my pension administered in a country outside the Eurozone with British law as the rule of law in the background rather than Napoleonic law , which doesn't recognise Trusts, !

I know that Bethel will disagree...........and so he may put the Malta case forward himself.

Malta's advantage rests purely on the number of DTAs it has being a separate and full Member of the EU (with all the pros and cons that go with that!).

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Swiss Gnome

Jun 27, 2012 at 09:53

Agree with both Tim & Anonymous.

The greatest problem is weeding out the manipulators who baffle the average investor, these being generally people who have little or no exposure to this sub culture financial world. We see schemes which have been recommended by highly paid 'independent' advisers and the evidence points to that they are also receiving introduction fees paid by the scheme management.

It is our intention, as armature new comers to these scams, to open the lid and get greater transparency and welcome all comments as from these here. So thank you and please keep up the dialogue it certainly helps to have such informed opinions.

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tim boles

Jun 27, 2012 at 10:21

Good point

I am in discussions with an ExPat in a far off warm country - who luckily is friends with one of our existing ExPatSIPP Clients

Let's call him Fred

Fred was sent some amazing brochure with various illustrations of 7% compound growth and how much that would give him after 20 years- no mention of inflation, and that he should send his pension off to Malta.

And the fees quoted look like "ANNUAL CHARGES INCURRED AT AN AVERAGE OF 0.9% (fine) those are their Capitals

But elsewhere in the small print it says:

GPB 1,000 pa management fee (OK?)

And then:

100% allocation on day 1- establishment fee taken over 12 years at 0.20% per quarter

WOW!

looks Ok until you do the maths- that is 9.6% back loaded commission and means that he is stuck with that investment for 12 Years

Unbelievable

And this is from a UK based operation

If he hadn't got in touch I guarentee he would not have realised just what this meant!

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Swiss Gnome

Jun 27, 2012 at 11:30

Tim

Exactly what has been happening with the UK based outfit we have been investigating, they won't even let the members see the Trust Deed information, unless they sit at a computer screen in an office with an officer in attendance as they claim it to be 'intellectual property'

To add to this the offices available to view are in Nicosia or London and for the privilege they are charging £230 per hour for their 'services.'

We are not in the financial business but nevertheless directly effected and determined to expose these unethical schemes.

Thanks again, please keep me posted on other related matters it helps with the research and we'll post developments.

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