Until now it has not been possible to have access to your frozen UK pension legally and with the permission of the UK tax authorities.
This has been primarily because, in return for the tax-relief an individual receives on their pension contributions, the Revenue is expecting to tax the income they receive when the compulsory annuity is purchased; and then take any residual value on their death!
However, in April 2006, it was announced that British expatriates could move their pension benefits to a Qualifying Recognised Overseas Pension Scheme (QROPS) with the Revenue's approval. The rules of the scheme must be broadly equivalent in terms of treatment, to a UK registered pension scheme and the QROPS trustee must provide Her Majesty’s Revenue & Customs (HMRC) with information on certain “events”.
The key difference is that a QROPS can be transferred to an onshore pension scheme in a more favourable jurisdiction once the individual has been offshore for 5 years.
If structured in this way, transferring pension benefits via a QROPS can have huge benefits: Firstly, if the pension is transferred to certain jurisdictions, the individual can take 25% of their pension’s value as a tax-free lump sum at any time after the age of 50 (this increases to 55 for any transfers which have not been completed by April 2010).
This is without the compulsion of purchasing an annuity. Annuities are extremely unpopular in the UK with both pensioners and the press because they are extremely poor value and (except in very few circumstances) never return what the pension has had to invest. On top of this, the income is taxed in the UK even if the individual is not resident there.
As there is no compulsion to purchase an annuity, the individual is free to do whatever they want with the released benefits. Some may choose to hold the money in a high interest offshore bank account which returns more than an annuity and is tax-free whilst they are resident outside Europe.
Case study……
D is 50 years old and is a UK national working on a project in Thailand for the next 5 years. She has a UK frozen pension valued at £250,000 that she cannot access until retirement age which is set at age 60. D does not intend to return to the UK and as a former accountant knows the pitfalls and disadvantages of having to purchase an annuity at some stage in the future.
We introduced D to a fully licensed and regulated IFA who had considerable experience in dealing with recognized QROPS and whose scheme is fully approved and compliant with HMRC. Following a full financial fact find it was recommended that D seriously considers moving her pension into a QROPS. This arrangement allowed D to re-invest the pension funds into a diverse variety of better performing assets and deposits.
As D does not intend on retiring to the UK there will be no deduction of UK tax and NO obligation to purchase an annuity at anytime in the future. Also, the transferred fund will be tax efficient in a way that allows D to pass the remains of the funds to her family in the future.
Submitted by Robert Price of Expat Investment Adviser
www.expatinvestmentadviser.com
