Many expats and international workers are confused over their best pension options once they have moved from Britain.
Qualifying Recognised Overseas Pension Schemes (QROPS) and self-invested pension plans (SiPPs) look like similar products but they are for very different customers.
The difference comes down to the definition of an expat.
Many British workers who temporarily leave the UK for a year or two to take up an overseas posting believe they are expats, but that’s not necessarily true.
An expat is someone who is no longer tax resident in Britain, while an offshore worker can live outside Britain but still be a tax resident.
Advantages of a QROPS
The advantages of a QROPS over a SiPP include:
- No lifetime allowance cap on the size of the fund – a SiPP is limited to £1.25 million
- No annual contribution limit – a SiPP is capped at £40,000 a year
- No inheritance tax on unused funds – UK pensions are taxed at 55%, although moves are afoot to change this in the UK
- No foreign exchange rate issues – QROPS pay out in several major currencies, but SiPPs pay in Sterling
- Possibility of a larger tax-free lump sum – Some QROPS pay out 30% of the fund as a tax-free lump sum but SiPPs are limited to 25% of the fund
An important point to watch for offshore workers who are still tax resident is that as a SiPP is an onshore pension product, the retirement saver still picks up tax relief on contributions into the SiPP. These can give a generous 20%, 40% or 45% uplift to the value of the fund.
Although non-residents can have a British SiPP, they will not benefit from pension contribution relief uplift.
QROPS are for British expats who are no longer tax resident in the UK and for foreign workers who have spent time in the UK and built up retirement savings but who are also no longer tax resident in the country.
If an expat or international worker puts further contributions into a QROPS, they will not receive tax relief from HMRC.
Other benefits, depending on the retirement saver’s attitude to risk, include a wider range of investments across more markets, commodities and currencies. SiPP investment is made in Sterling although putting money into global funds is possible on many platforms.
With more than 3,300 QROPS available from 42 financial centres, many of the schemes are hosted in one centre and allow the retirement saver to live in another.