A recurring question for British expats who want to make retirement savings with a pension is whether to opt for a SiPP or a QROPS.
A SiPP is a self-invested pension plan, while a QROPS is a qualifying recognised overseas pension scheme.
Most financial advisers will talk about the pros and cons of each scheme, but the bottom line is what really counts is tax residence.
Tax residence is the term that describes the place where you live and pay tax.
As an expat, you can live in Britain and pay tax here while working overseas.
Tax residence decides pension status
But the true meaning of the term ‘expat’ is not the definition of someone who has just left the UK on an extended stay, but someone who has left the country permanently to settle somewhere else.
Deciding tax residence can be tricky – hence a stack of court cases and tax tribunals to try and decide the finer points.
However, all this dilutes down not to how many days someone stays in or out of Britain in a tax year, but to whether they have truly broken their ties and moved on.
To demonstrate this, an expat would need to show they no longer have a home in the UK waiting for them when they pop back for visits, that they have no bank account or driving licence and that their main life is based somewhere else.
This does not answer the SiPP v QROPS question.
However, once tax residence is decided, the expat has their pension strategy rolling out in front of them like a carpet.
Debunking a QROPS myth
A temporary expat have home thoughts from abroad is probably better off with a SiPP. The main advantage is the tax break on pension contributions at their highest marginal rate of tax.
QROPS do not qualify for this tax break because the expat has to be a British taxpayer to meet the rules, and as a British resident taxpayer cannot take out a QROPS, the question never arises.
Similarly, a SiPP is no good to permanent expats because they lose one of the main advantages – the tax break – because they live overseas.
Another myth about QROPS is that many schemes are pension liberation or unlocking scams that help under 55s access their pension cash early.
However, recent fraud warnings about these schemes from the Financial Conduct Authority, which regulates pension firms and advisors, The Pension Regulator and HM Revenue and Customs, all point at British onshore pensions and not QROPS.