For expats living outside of the United Kingdom (UK), the option to move your pension to a qualified recognised overseas pension trust (QROPS) in one of the tax effective jurisdictions was a no brainer. With the pending divorce between the UK and the European Union the option to transfer a pension to a QROPS provider will likely mean that you will become liable for a transfer tax of 25%.
For an expat to pay a 25% transfer tax on what could be the majority of their retirement savings is a hard pill to swallow.
There are also several layers of costs that are associated with a QROPS package such as: an initial setup fee, annual administration fee, platform fee, fund management fee, advice fee and other miscellaneous costs along the way.
Realistically speaking, on an after (transfer) tax basis – being 75% of the initial pension value – the investor would now have several other layers of costs that they would be liable to pay before making headway in growing the capital value. If for arguments sake we assume that markets are coming to the end of their cycle, with the possibility of lower returns within the medium term while the investor starts to withdrawal an income from their remaining capital, then the investor’s capital would be eroded away at an alarming rate.
Depending on both the investor’s circumstances and market cycles, this may suggest that the initial 25% transfer tax may be too high a cost for the investor to bare. After all one can assume that this was the intention of the HMRC.
This leaves an expat to wonder what options are available with regards to what they can do with their UK pension.
How can I maximise the tax effectiveness of my offshore pension without paying any penalties?
Depending on an investor’s situation they have the option to have their full pension encashed if the retirement age has been reached – the nil rate of tax would then apply. The issue then becomes the fact that they have lost the tax effectiveness of the pension fund i.e. the money now forms part of their estate and is open to creditors in the event of a claim. From here the investor can potentially do what they will with the capital, however there is potentially a lot of unforeseen risk or disadvantages if the wrong choices are made.
One of the options is that the pension benefit can be used to contribute towards an offshore pension trust, whereby the investor retains many of the main benefits that they would otherwise have had if they had used a QROPS.
A number of investors prefer to leave the capital offshore in a regulated/registered pension structure rather than bringing the money back to South Africa or investing it offshore whilst in their estate.
The benefits to using a regulated/registered pension structure are as follows:
- The capital remains outside of your estate;
- Flexibility of how the capital is invested;
- Potential tax benefits on the income that is drawn; and
- The capital remains outside of the South African jurisdiction.