It is always a little sad when one has to start worrying about pensions.
Expats are no different to most people in that the word ‘pensions’ reminds us that aging is inexorable and that we need to think about making some sort of provision for that period in our lives when work may be a thing of the past.
For expats there are always added complexities. Will the pension be payable locally? Will it be taxed back in the old country? What are the currency issues? How will legislation ‘back home’ affect me if I’m living overseas?
This is a vast and complicated area and this is the first in a short series of articles that will examine one particular aspect of the pensions maze – QROPS. This slightly scary acronym stands for Qualifying Recognised Overseas Pensions Scheme and relates to how expats can move their pensions out of the UK to their new country of residence.Before we get into the intricacies of this, let’s first think about some basic definitions and facts.
Pensions are complicated!
One of the characteristics of articles on pensions is that any ‘what is best for me?’ type questions can’t be answered simply. What you as a reader should do with/about your pension scheme to maximise your benefits and reduce your risks is something that can only be decided once an expert has discussed with you your individual specific circumstances and made some evaluations based upon understanding those in-depth.
You should never make decisions about what to do with your pension based upon any general article, including this one. In a sense this is a disclaimer – always consult an expert to make sure you know you’re doing the right thing.
What is a pension?
No single article can describe the complexities in full of the UK’s pension system.
In this article we’ll consider simply that a pension is a financial provision (policy, investment, employer’s scheme etc) that you contribute to over your working life so as to provide you with regular income from your retirement onwards. They will be governed by legislation that restricts what you as ‘the saver’ can do with the funds accumulated before retirement age and in theory, what the person holding your pension funds can do with them.
Types of pension
There are vast numbers of schemes policies and financial instruments that all qualify as ‘pension schemes’ and they will have different characteristics. For the purposes of this article, we’ll consider that all of them come under one of four headings;
– State pension
– Private pensions schemes
– Occupational pension schemes
– Estate & Related Pensions
At the outset we can discount here ‘estate’ and special arrangement type pensions. These are rare and usually include things such as sums paid regularly after retirement age from a family estate scheme or trustee fund etc. These tend to be highly specialist areas and if you are in receipt of such you most certainly will need advice on what’s best for you if you’re thinking about how expat status may affect them.
The state pension is something that most UK citizens will be familiar with. Basically it works quite simply – as an employee amounts are deducted automatically from your salary and invested by the government. If you’re self-employed you equally simply make mandatory pensions contribution payments to the social services organisation. There are schemes for both employees and the self-employed to ‘top-up’ their contributions if they wish to secure a higher payment at retirement age.
At retirement age, and presuming you have made sufficient contributions over time, you will be paid a state pension each month.
QROPS has no effect on these state pensions or the estate type pension payments.
Occupational pensions schemes allow employers to take and make contributions on behalf of their employees and invest this into pension schemes. At retirement age the company will pay its retirees an annual pension. These schemes are sometimes referred to as ‘company pensions’.
For many years people have also been able to save for their pension by investing in private pension schemes. Sometimes they have been able to fund this by ‘opting out’ of some components of the state scheme and/or their occupational pensions schemes. These private pension schemes also offer regular income payments upon retirement.
It is within these two categories of private and occupational pensions that QROPS has its effects.
For convenience from this point onwards we’ll refer to these collectively as non-state pensions
For many years the non-state schemes were effectively ‘locked’ with the contributor being able to do little or nothing with the funds that had accumulated there. This was a particular challenge for expats who, for many reasons, would have preferred to move their pension fund(s) overseas with them easily and without trauma.
It is worth making clear at this point that there is an important difference between an expat receiving their pension payments overseas and moving their pension or pension fund overseas. It has always been possible and relatively easy to get a UK state or non-state pension paid to you overseas even if sometimes through a UK bank as intermediary. Moving your pension overseas is different and involves shifting the accumulated savings and funds out of the UK to a new company or institution overseas who will then have responsibility for paying you your pension at retirement age.
The political & economic objectives of pension schemes
It’s not unusual to find people, expats or otherwise, who struggle to understand why they can’t access their pension funds as they wish. If you have 30 years worth of accumulated savings in the UK in your various pensions, why can’t you take 25% of it out to fund that new house extension? You know that locally to you in your new country there is a bank that offers apparently superb pensions schemes, so why can’t you just transfer all your UK pension savings into the new local scheme?
Some countries believe that the state has an obligation to look after its citizens and should not allow them to get themselves into a position whereby they become destitute at retirement – an age where most will be unable to recover their financial position. It’s also true that the state does not wish to be left with lots of pensioners to support who have no income via savings in either state or private pensions.
In these countries, and the UK is one such, the state insists that all people contribute some of their earnings through life into a pension scheme to provide for their old age. As such, governments cannot allow unrestricted access to these funds without putting at risk this objective.
Over recent years however, the EU has recognised that we live in an increasingly global and mobile world. The EU was keen to ensure that people are treated equally when making pensions contributions and that they have the right to move their funds where required. Out of this QROPS was born – to provide a facility to allow the transfer of pension funds from the UK to an overseas country and scheme.
QROPS – The principles
QROPS was introduced under UK legislation and practice changes in 2006. Basically it now means that people will be able to transfer their non-state pension funds to an approved overseas scheme.
What this means simply is that if you are living in say Australia and wish to transfer your UK non-state pension fund to a local pension organisation scheme, then you can do so. As a point of technicality, you do not have to be resident in the country you transfer to.
So if you live in Australia you could transfer your non-state pension funds from the UK to New Zealand or France – that would be perfectly acceptable under the scheme.
The key thing to note though is the use of the word ‘approved’ in the above. Any overseas scheme that you wish to transfer your pension to must be approved by Her Majesty’s Revenue & Customs (HMRC).
The ‘approved’ here means that the scheme is legally registered and approved as a pensions scheme in the country concerned, and that it is able to comply with the mandatory reporting requirements of HMRC. We will explore this further in a following article.
A full list of qualifying schemes and companies listed by country is available on the HMRC website www.hmrc.gov.uk
So your very first port of call should you be thinking about transferring is to check through that site what schemes are listed as ‘approved’ for the country you’re considering.
In the next article, we’ll be exploring QROPS further and looking at some specific examples as to WHY a QROPS could be advantageous to an expat.
For advice, please use our QROPS UK pension transfer enquiry form.