How A Tax-Free Lump Sum Works For QROPS Pensions

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Written By Saeed Maleki

The Qualifying Recognised Overseas Pension Scheme (QROPS) is all about easier access to retirement cash, but most of the talk from expats is about tax not funding their later years.

QROPS are popular pensions with expats – almost 110,000 British retirement savers have shifted £8.8 billion into one of the offshore schemes during the past decade.

But the focus is often tax instead of pension benefits that the schemes can offer.

A lot of that focus is on the tax-free cash lump sum available from a QROPS.

Tax-free is a misnomer. The tax an expat pays on their lump sum withdrawal depends on the rules and rates on the country where they are tax resident.

Tax-free cash is real – but not for everyone

So, a QROPS member can take up to a 30% cash lump sum from their offshore fund in a QROPS jurisdiction like Malta and pay zero tax in a country such as Dubai in the United Arab Emirates as residents there enjoy no taxes.

However, another expat in France could have an identical QROPS pension but would likely to have to hand a share to the French tax authorities.

The lesson is do not take promises about benefits on face value – if they apply to you depends on your personal financial circumstances and where you are tax resident when you take the money.

To find that out, the chances are an expat would have to take professional advice from a qualified and regulated IFA recognised by financial regulators in the country where they live.

Why is the cash lump sum important to QROPS?

If tax is an issue, planning to take the money when resident in a low or zero tax country is an important benefit to many retirement savers.

Don’t forget that once a UK pension is moved to a QROPS, the lifetime allowance limit of £1 million no longer applies, so the difference between 25% of the fund tax-free in the UK and 30% elsewhere can be a significant amount of money.

That’s £300,000 as 30% of a £1 million pot, compared to £250,000 at 25%.

Another bonus is British expats can ask for their QROPS payments gross of tax in one of many popular foreign currencies.

Again this switches income tax away from the UK to the expat’s country of residence, where little or no tax may be due on the benefits.