Best Retirement Destinations in the World After 25% Exit Tax on Certain QROPS Introduced
In this article, we will discuss the best retirement destinations in the world for Brits wanting to move abroad after Philip Hammond introduced a 25% exit tax on many QROPS. If you are moving to the European Economic Area (EEA), Australia, New Zealand or Hong Kong and staying there for five years following your pension transfer, you will be relatively unaffected by the new rules. For those living further afield, you must now weigh up the option of paying a 25% exit tax vs keeping your pension in a UK SIPP and possibly paying up to 45% income tax plus a death tax after the age of 75 in the UK. A thorough understanding of International Tax Treaties is needed and we highly recommend speaking to a QROPS specialist and/or an international tax attorney.
Best Places to Retire Abroad for Brits
Here are the best retirement destinations for British expats in 2017 for tax reduction…
If you are looking to pay zero tax on your retirement income, the best places to retire abroad for Brits after the new QROPS rules in 2017 are Australia, New Zealand and Hong Kong which all attract zero tax.
Portugal also does not tax British expats for the first ten years that they are in Portugal.
Some countries in Europe attract zero income tax such as Monaco or Andorra. Low tax rates can be found in these other European countries: Bulgaria, Cyprus, Malta, Gibraltar, Hungary, Latvia, Liechtenstein and Romania.
For places outside these areas (EEA, Australia, New Zealand and HK), there is now a 25% one-off exit tax payable to HMRC on transfer out of the UK. So, for many countries now, you may be better off in a UK SIPP or paying the exit tax if you have a very large pension pot and live in a country with a high income tax rate.
Moving to Australia
Australia is still the top destinations for Brits who want to retire abroad. There are more than 1,300,000 Brits living in Australia.
If you are over age 55, you can move your pension pot to Australia and pay zero tax on your retirement income, however, you can only move around 172,250 GBP pension pot in one go and there are other restrictions.
For those under 55 or for those with larger pension pots, you may have to transfer to a UK SIPP first or to a New Zealand QROPS if you are concerned to get your pension out of the UK tax net before rules are tightened further.
The rules for QROPS in Australia are affected by QROPS rules imposed by HMRC in the UK and tax rules set by the Australian Tax Office (ATO).
The new rules, from July 2017, allow you to transfer a UK pension into an Australian SMSF (Self Managed Super Fund) only once you have reached 55 years of age and you can only transfer in 300,000 AUD (about 172,250 GBP) into your Australian QROPS and then you can move a further 100,000 AUD per year. So, you may have to set up a UK SIPP first and drip feed your pension into your Australian QROPS.
An Australian QROPS which is an Australian SMSF specifically designed for those aged 55 or over, attracts zero income tax at retirement. There is also no tax on death.
These are the technical rules: you are allowed 25,000 AUD as a Concessional Tax-deductable Contribution, as well as 100,000 AUD as a Non-Concessional Contribution with the ability to bring forward 3 years or 300,000 AUD with no further contributions for the following 2 financial years.
Any Non-Concessional Contributions are tax free going into the fund.
Concessional Contributions, where the individual claims a personal tax deduction are taxed at 15% in the fund and the individual claims a deduction on their personal tax return. This is great for anyone with Australian taxable income.
For a person with a very large pension pot which is over the Australian lifetime limit of AUD 1,600,000, clients may be better off transferring their pension to New Zealand and paying a one off 25% exit tax than paying the 32.5 – 40%+ Australian income tax above 37,000 AUD in Australia. Why? Well, due to the NZ-Australian DTA, there is no further tax due in NZ or Australia. Then the client can build up an Australian SMSF separately and would still have the whole lifetime limit to be able to contribute to.
Five Year Rule – you must live in Australia for five years after transfer to avoid the 25% exit tax in the UK. If you move to another country, this tax can be imposed on your pension pot at a later date. Although you may be able to avoid the tax by moving to another appropriate QROPS, for example if you moved to the EU and moved your pension to a Malta QROPS, if allowed.
You can read more about the Australian QROPS rules here.
Moving to New Zealand
More than 215,000 Brits live in New Zealand. For British expats in New Zealand and Kiwis returning from working in London or elsewhere in the UK, the process is much more simple. As long as you remain resident in New Zealand for five years after transfer, you avoid tax on your pension scheme.
You can transfer a pension to New Zealand and then pay zero income tax at retirement. There is also no tax on death.
Five Year Rule – however, you must live in New Zealand for five years after transfer to avoid the 25% exit tax in the UK. If you move to another country, this tax can be imposed on your pension pot at a later date, although you may be able to avoid the tax by moving to another appropriate QROPS.
You can read more about transferring a pension to New Zealand here.
Moving to Hong Kong
You can transfer your pension to Hong Kong and pay zero income tax, no tax on growth and no tax on death on your pension as long as you remain resident in Hong Kong for the five years subsequent to transferring your pension. If you move to another country within these five years, you may face a 25% exit tax, unless you can move to another QROPS which avoids the exit tax.
Moving to the European Economic Area (EEA)
You can move your UK pension to a Malta QROPS which is based in the EU for tax efficiency if you are resident in the EEA. The EEA is comprised of the European Union (EU) as well as Lichtenstein, Iceland and Norway.
Over 700,000 Brits live in Spain with 200,000 British expats living in France.
The EEA consists of Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom.
Although the UK may leave the EEA after Brexit. If will certainly leave the European Union.
A Malta QROPS has strong Double Taxation Agreements with most countries in Europe and often your QROPS is paid out gross in Malta with no tax deducted. Usually, you would pay income tax in your country of residence.
A Malta QROPS also allows full pension flexibility, so you can draw down as much pension as you want in retirement.
You can read more here on transferring a pension to a QROPS in Malta and the Double Taxation Agreement rules.
Five Year Rule – you must live in the EEA for five years after transfer to avoid the 25% exit tax in the UK. If you move to another country outside the EEA, this tax may be imposed on your pension pot at a later date if you do not move to another appropriate QROPS, for example if you move to a QROPS in Australia, New Zealand or Hong Kong and become resident in these countries.
Moving to the USA
How many Brits live in the USA?
Nearly 700,000 Brits live in the USA.
You cannot transfer a pension to the USA as the IRS won’t allow it. Other options include moving your pension to a UK SIPP and using the US-UK Double Taxation Agreement. Your pension can then be taxed in the USA rather than the UK. Although you would still face the death tax in the UK after age 55 and be subject to US income taxes.
If you haven’t moved to the USA yet, you could move to a QROPS in Malta or a QROPS in Hong Kong to avoid the death taxes. However, both would attract the 25% exit tax and US income taxes. But, would avoid any taxes on death.
Moving to Canada
How many Brits live in Canada?
There over 700,000 Brits living in Canada.
You cannot transfer to a QROPS in Canada. The QROPS there were all removed from HMRC’s QROPS list.
You can move your pension to a UK SIPP or pay a 25% exit tax and move to a QROPS in Hong Kong. Thanks to the Canadian-Hong Kong Double Taxation Treaty, there would be no further tax on your QROPS in Hong Kong as the taxation rights are given to Hong Kong. So, you just pay a one-off 25% tax, then no tax on your retirement income and no tax on death.
Moving to South Africa
You cannot move to a QROPS in South Africa, but you can pay a 25% exit tax and move your pension to Hong Kong.
South Africa has very high income taxes, same as the UK of up to 45%.
You may be better off paying a one-off 25% exit tax and then zero taxes after that as the SA-HK DTA gives the taxation rights to Hong Kong and is taxes at zero.
It depends on the size of your pension pot and other income. Smaller pots are better left in the UK or moving to a UK SIPP.
Moving Elsewhere in the World
If you are outside Australia, New Zealand, the EEA (Europe) or Hong Kong, you will face a 25% exit tax. Usually, if you are set on transferring to a QROPS, Hong Kong is preferable as there is zero income tax in Hong Kong and many of the Double Taxation Agreements actually give the taxation rights for pensions to Hong Kong.
Examples where it is still necessary would be where you have a large pension would normally still be taxed in the UK on your pension or you are moving to a country with high income tax rates such as the Netherlands (up to 52% income tax), Japan (up to 55.95%) and South Africa. Sweden, Austria, Belgium, Denmark, Finland, France and Israel all face up to 50%+ income tax rates.
You can see the list of countries with the highest income tax rates here.
Obviously, the best retirement destinations in the world don’t depend on the tax rate, the local cost of living, the culture, the food and the entertainment are more important, but I hope this acts as a useful guide if you can’t make your mind up bewteen living in a few countries abroad and provides clarity on the government’s new rules.