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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
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.
More about this:
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