Cashing in abroad

As increasing numbers of Britons look to retire abroad, Richard Mattison goes into the issues surrounding paying pensions to overseas residents

Studies by the Institute of Public Policy Research revealed a couple of years ago that at least 5.5 million British born people live abroad. While the numbers of those leaving the UK peaked in 2006 at 400,000 and have since reduced, and the recession has led to a number of people returning to these shores, the numbers living abroad still total over five million, of which 1.25 million are aged over 60.

What this means of course is that there is still a high demand for pensions advice from those who have moved abroad but have UK pension arrangements either in payment or about to mature.

Following Pension A-Day in 2006, the new concept of Qualifying Recognised Overseas Pension Schemes (QROPS) appeared, and for a short while it seemed that they might offer the solution to all those expat queries over what to do with their UK pension plans - after all, the idea of living abroad for five years and then transferring the UK pension to a QROPS and withdrawing the whole fund tax free seemed too good to be true. And of course it was!

Things to be aware of

QROPS can involve as many problems as they do solutions. Just a few of these being:

For those resident in Australia, New Zealand and Canada, a QROPS based in another country will be subject to an annual wealth tax, meaning the only viable option is to transfer to a pension arrangement in that country.

The same applies to a number of EU territories unless the QROPS is also based in the EU.

The Government has announced a review of offshore tax havens (e.g. Guernsey, Jersey, The Isle of Man, The Cayman Islands etc) which may affect the treatment of QROPS.

Some territories such as the Isle of Man charge tax on benefits being paid from the pension scheme (on pensions and the residual fund on death), but as there is no double taxation treaty, additional tax will be paid in the member's country of residence and domicile.

The Government has withdrawn QROPS status from Singapore, and other locations may follow.

Pension investment rules in a number of QROPS locations are more restrictive than in the UK where SIPPs are so popular.

Rather than negotiate the QROPS minefield, the alternative therefore would be to maintain the client's pension arrangements in the UK. This may be the preferred option anyway if the individual concerned is considering moving back at some point before he or she dies. In these cases the options for paying retirement benefits can be considered.

Firstly tax free cash. Broadly speaking, in the UK 25% of an individual's accumulated pension arrangements can be paid as a tax free lump sum at retirement. However, if that sum is paid overseas it is likely that it will be subject to income tax in that country. Payment to a UK bank account may therefore be a preferred option, although on repatriating this to the country of residence, strictly speaking tax may still be payable.

The method for payment of pension depends on whether a double taxation treaty exists between the UK and the country of residence. At the time of writing, the UK has 121 double taxation agreements with other countries, including all of the top ten most popular destinations for expats.

Because of this, a UK pension member who is resident in another country should be eligible to receive their pension gross without deduction of UK income tax. He or she will need to complete a double taxation agreement claim form with the tax authorities in the country of residence and once approved, should be submitted to HMRC in the UK for authorisation. The HMRC guidance notes and paperwork to apply for gross payments are known as IR304 and are available on its website.

The UK pension provider will need a copy of the HMRC authorisation to commence making gross pension payments.

The other problem involved with paying pensions to an overseas resident is currency fluctuations. This is best illustrated by an example.

Assume on the 1 March 2008 a male aged 60 and resident in Spain with a UK SIPP valued at £200,000, commenced benefits. He received a tax free lump sum of £50,000, and was entitled to a maximum unsecured pension calculated as 120% of the Government Actuary's rate which is set for five years at £11,520 per annum which the client elects to receive quarterly in advance at the maximum rate (i.e. £2,880 per quarter). This can be paid gross under the double taxation treaty.

Under normal pension payment methods, the gross pension would be converted to Euros at the time of each quarterly payment. The amounts paid to the client would therefore be as follows (this does not include currency conversion charges):

As you can see, by this method the result of currency fluctuations means the client has received EUR679 fewer over the year than if the original amount had been paid, which amounts to £562.

Over the lifetime of a pension in payment which can be up to 35 years, an unfavourable exchange rate trend such as this could amount to thousands.

A very simple method to avoid this would be to hold the cash and pension assets in Euros from outset. By doing this, the GAD rate can be applied to a fund denominated in Euros.

In the example, the £150,000 on the 1 March 2008 would represent EUR195,593. By applying the maximum unsecured pension to this gives a pension of EUR15,021 p.a. or EUR3,755 per quarter. As this is fixed for five years the effect of subsequent currency fluctuations are avoided for that period.