In recent times the UK government has made it clear through legislation that non-residents will be quickly and efficiently brought back into tax residency status if they earn significant income in the UK, and whilst pension funds are not ordinarily included, the wide ranging ambit of HMRC cannot by assumed to ignore pensions in the future.
Transferring UK-based pension funds to a qualifying recognised overseas pension schemes (QROPS) means funds can be managed offshore with a variety of instruments for example, art, jewelry, antiques, high risk markets, and more.
For British citizens resident in Spain, earnings paid into a UK pension fund whilst working in the UK can now be repatriated offshore, just like other non-property investments, and the UK government through HMRC have legislated that QROPS are the only providers they will accept. Offshore funds that are popular with British citizens include the Isle of Man, Guernsey, New Zealand.
The advantages of a QROPS transfer are that invested funds once repatriated are then available to be reinvested in a much broader range of activities than is possible by leaving it in the UK, funds can be accessed (drawn down) at any time between 50 and 75, there is no requirement to purchase an annuity to avoid taxation, and perhaps most importantly, a QROPS managed fund does not attract UK inheritance tax and remaining funds can be willed to future generations.
QROPS Five Year Rule
Repatriating a UK pension is an established procedure with regulations determined by HMRC, allowing a QROPS to accept and then manage the investment. After funds have been repatriated, it remains possible to transfer funds between QROPS companies.
As soon as non-residency in the UK is declared, within which there is a requirement to state that the member intends to remain non-resident for the foreseeable future, all UK pension funds can be transferred to a QROPS, though there is a five year rule of behaving like a UK pension fund and reporting to HMRC that applies.
The five year rule applies when the member of the fund has been resident in the UK for any period of time in the last five years. This means that UK pension funds can be transferred to an offshore QROPS at any time after non-residency is declared, but the full advantages won’t be evident until a period of five years non-residency has passed.
After five years, the requirement to behave like a UK pension ceases, as does tax reporting to HMRC.
Why Take Control of Pension Fund Now?
UK pension funds are largely intended to be a secure form of investment to provide for people after retirement, however, mandated regulations prevent riskier investments (high interest investments) and generally don’t allow access to funds, as well, UK pensions cannot be willed to children. All remaining funds on death are transferred to HMRC consolidated fund.
In addition, the UK government frequently reviews QROPS and adds or removes country schemes that do not meet their requirements. There is no guarantee that HMRC will allow QROPS in the future, so moving funds now is prudent.
Pension funds paid into private sector schemes, company schemes, public sector schemes (including armed forces) are all eligible for repatriation to a QROPS, meaning that low interest schemes can be converted via QROPS to high interest investments giving a boost to member funds not currently possible if funds remain in the UK.
A typical person from the UK who worked 20+ years may have accumulated combined funds in excess of £200,000 and this money could grow even further by reinvesting in a QROPS, but the most compelling reason for removing these funds from the UK is the possibility of accessing part of the fund for personal use, and ensuring that children or dependents inherit the funds.