HM Revenue and Customs-recognised QROPS – or Qualifying Overseas Pension Schemes – are effective investment and pension income schemes for UK pension holders moving abroad.
Whilst there is a host of benefits, a particular advantage concerns the receiving of pension income.
Currency has historically been a particular worry to overseas pensioners, as the need to time pension income to make the most of fluctuations within currency rates between sterling and the euro is time-consuming and unpredictable.
As a QROPS can pay out pension income in most major currencies, this worry is avoided.
Other benefits include:
- Enjoy a larger and more flexible pension income
- Avoid UK’s income tax on your income
- Receive a lump sum of up to 30%
- Much larger range of investment choices
- Ability to mitigate against Spanish inheritance tax
- Avoid UK’s ‘death taxes’ of up to 55% of your fund
- Opportunity to consolidate multiple pensions into one efficient structure
- Protection from UK’s Lifetime Allowance limit.
Whilst these constitute some of the main aspects of QROPS, each scheme provider is different, and a lot depends on where your QROPS will be based – i.e. the QROPS jurisdiction.
The need to find the most suitable QROPS jurisdiction for your specific needs is twofold: Firstly, you need to ensure your pension fund is safe in a regulated environment, and secondly, you need to ensure that you can receive your pension income without paying unnecessary taxes.
Finding the right jurisdiction
Before the transfer, you need to address how your tax position would change with different jurisdictions.
As Spanish regulations don’t recognise trust structures, a QROPS transfer means taking money from trust out of trust – leading to new tax burdens if you choose a Spanish QROPS.
Therefore, individuals with a UK pension living in Spain should transfer their pension pots into a different jurisdiction which can hold the money in trust.
This needs to another important consideration – namely your tax liability.
When a jurisdiction with a suitable double taxation agreement (DDA) with Spain is in place, you only have to pay tax once; with obvious financial benefits.
Taking a closer look at the benefits, as your pension income is paid gross when a DDA is in place, there can be a significant taxation advantage.
For Spanish tax residents, your trustee can supply a ‘temporary annuity’ certificate. On this basis, you pension income will only incur a small income tax from the Spanish tax authorities – which could be as little as 3%.
This is significantly less than receiving drawdown payments from your UK pension which will be taxed at the largest marginal rate.
However, the trustees would have to ensure it was an annuity that was paid and not just drawdown.
Of the suitable jurisdictions with a direct tax treaty, Malta enjoys an established standing as a secure financial centre with its own pension regulator – the Malta Financial Services Authority (MFSA) – which offers international investor protection.
The island has three core advantages for UK residents moving to Spain:
- low-cost economy
- English speaking jurisdiction
- member of the European Union.
However, before a transfer, you should consult with a financial advisor to ensure you know your full financial position, including knowledge on the Spanish tax system, and UK legislation concerning offshore pension schemes.
Careful planning with a regulated independent financial advisor will not only ensure the most preferable QROPS jurisdiction is chosen for your needs, but that you feel confident with your decisions and fully aware of any requirements or considerations you should be aware of.