Qualifying Recognised Overseas Pensions offer Brits who are going to leave the United Kingdom the chance to transfer their UK pension to a foreign scheme, without paying UK income tax. Thanks to recent clarification from HMRC, it is also now apparent that QROPS are also exempt from UK inheritance tax. But how does the system work?
The default position for people who leave the United Kingdom but continue to draw a pension that is based here is that they must pay UK income tax on their withdrawals. That tax rate depends on the individual’s personal circumstances.
If you are no longer living in the United Kingdom and therefore no longer benefitting from the services that these taxes are meant to be providing, then no doubt continuing to pay UK income tax must be immensely frustrating.
QROPS are available to people who leave the United Kingdom for at least 5 years. The exemption is dependent on the scheme member being non-resident for tax purposes during that time. The occasional visit back to the United Kingdom is permitted to visit relatives, but QROPS investors need to be careful not to get clawed back into UK residence accidentally. If you are in any doubt about this, it may be best to consult a professional financial adviser on the issue.
From a practical perspective, if you go back to live in the United Kingdom during that time period, you may be faced with a penalty and a large tax bill on your return.
During that initial five year period, QROPS administrators must make reports to HMRC about the QROPS’ activity – e.g. what, if any, withdrawals have been made. However, after that period, HMRC has no right to know about these things and the reporting requirements fall away.
It should not be forgotten that whilst your pension may have escaped UK income tax, you may be liable for taxes in your new country of residence. However, your QROPS adviser should be able to take steps to mitigate your tax bill.
