Pension Tax Relief for Dummy’s. Free Guide Guide to UK Pension Transfers: QROPS, QNUPS and SIPPs
A QROPS, QNUPS and SIPPs guide simplified for British expats either living or wishing to retire abroad. Also relevant for any nationality who has worked in the UK and built up a substantial pension and wants to beat the tax man at his own game.
Almost 1 in every 10 people from the UK now lives abroad permanently. In this ever changing landscape, how can British expats and people who have worked in the UK take advantage of their new status and avoid paying UK taxes?
Fortunately, changes in pension regulations means that you can now avoid UK taxes on your existing UK pension schemes by transferring them abroad. As you are not using any of the services in the UK anymore and you have paid your dues whilst you worked there, why should you continue to pay UK taxes?
Here is the breakdown of the top destinations for Brits living abroad from the BBC’s Brits Abroad project:
An estimated 5.5m British people live permanently abroad. The emigration of British people has happened in cycles over 200 years. The trend is now rising again: some 2,000 British citizens moved permanently away from the UK every week in 2005.
When are you non-resident for UK Income Tax?
You’ll be treated as non-resident from the day after you leave the UK if you can show:
- you left the UK to go abroad permanently or your absence and full-time work abroad lasts at least the whole tax year
- your visits to the UK are less than 183 days in a tax year and average less than 91 days a tax year over a maximum of four consecutive years
What do I need to do when I leave the UK?
Your Tax Office will give you form P85 ‘Leaving the United Kingdom’ to get any tax refund you’re owed and work out if you’ll become non-resident. If you still need to complete a tax return after you leave they’ll let you know.
BRITS ABROAD: THE TOP COUNTRIES
Country name Resident Britons
United States 678,000
New Zealand 215,000
South Africa 212,000
What are the choices for Brits moving abroad?
(1) Leave it where it is and continue to pay UK taxes for services you don’t use.
(2) Transfer it to a SIPP, QROPS or QNUPS and avoid most UK taxes.
What taxes do I pay at the moment on my UK pension?
Income Tax on UK Pension Schemes
£0 – £7,475* 0% (this will be 20% for higher rate tax payers in the near future*)
£7,275 – £35,000 20%
£35,000 – £150,000 40%
*From the 2010-11 tax year the Personal Allowance reduces where the income is above £100, 000 – by £1 for every £2 of income above the £100,000 limit. This reduction applies irrespective of age. Furthermore, the personal allowance will be reduced to zero in the near future for higher rate income tax payers.
Dividends Tax on UK Pensions
What is dividends tax?
This is tax on the income from UK company shares, unit trusts and open ended investment companies (OEIC’s).
£0 – £35,000 10%
£35,000 – £150,000 32.5%
Capital Gains Tax (CGT) on UK Pensions
Normally you wouldn’t pay GCT on your UK pension unless the plan owns property.
What is Capital Gains Tax (CGT)?
Capital Gains Tax is a tax on the gain or profit you make when you sell, give away or otherwise dispose of something that you own, such as shares or property.
You do not pay CGT on your main residence, car, UK gilts (bonds), lottery winnings or personal belongings less than £6,000.
If you have multiple properties, you will pay capital gains tax when you sell them. You can avoid this through a transfer to a QNUPS. You can set up a QNUPS even if you never retire abroad… more on this later. Most who have multiple properties will be taxed at 28%.
You don’t get taxed on the first £10,600.
CGT Tax rates:
- 18 per cent and 28 per cent tax rates for individuals (the tax rate you use depends on the total amount of your taxable income, so you need to work this out first )
- 28 per cent for trustees or for personal representatives of someone who has died
- 10 per cent for gains qualifying for Entrepreneurs’ Relief (if you are a sole trader or partner in a company).
Not everyone pays Inheritance Tax. It’s only due if your estate – including any assets held in trust and gifts made within seven years of death – is valued over the current Inheritance Tax threshold (£325,000 in 2011-12). IHT is 40% on the amount over this threshold.
If you are an expat living abroad with UK wife: Threshold is £650,000
If you are an expat living abroad with wife who is not from the UK: Threshold is £380,000
If you are single or divorced and living in Spain: Threshold is £325,000
Above this threshold, you pay 40% tax on your estate and assets.
What return would I get on a UK Pension?
State pensions and most final salary schemes are linked to the rate of inflation. New regulations now mean that your pension will increase by the CPI (Cost Price Index) rather than RPI (Retail Price Index). This is lower as it excludes housing costs such as mortgages and council tax.
The affect on your pension means that it will likely increase by about 2.5% rather than 3.5% per year. The target rate is 2%
The Telegraph stated that10m older people get £207m less next year than they would under the current system.
CPI Table (1996-2010)
|This is the table for annual rate of CPI since 1996 when they first officially started measuring it. The average over the 13 year period puts it at just below 2%.|
Summary of Taxes on UK Pension Schemes
Income Tax 0%, 20%, 40% and 50% rates
Dividends Tax 10% – 42.5% (on income paid from shares)
Capital Gains Tax 10%, 18% or 28% (on multiple properties and shares)
Tax Upon Death 55% tax upon death once you are drawing retirement benefits. 0% before you take benefits.
Qualifying Recognized Overseas Pension Scheme (QROPS). Pension Tax Relief
Pension regulations changed on ‘A’ Day, 2006 allowing anyone who is considering retiring abroad, British expats and people who have worked in the UK to transfer their pensions offshore.
Where is a QROPS held?
A QROPS can be held in any jurisdiction that is HMRC approved and follows the QROPS rules. Typically, the safest jurisdictions which have been running the longest and have the greatest number of members lie in Guernsey & the Isle of Man, although there are many other schemes in other jurisdictions. Each jurisdiction has its own unique tax benefits and rules.
Do I have to be a British expat to move into a QROPS?
No. Anyone who has worked in the UK can transfer their pension into a QROPS. If you still live in the UK, you can transfer your pension into a QROPS if you are going to retire abroad. The advantage of moving would be to avoid any future UK tax regulation changes which may not allow such a transfer or increase taxes or place limits on the transfer amount.
When should I move my UK pension into a QROPS?
If you are moving abroad or considering moving or retiring abroad, you should consider moving into a QROPS. However, if you are still paying into a UK pension plan and receiving UK tax relief, you should wait until you are no longer contributing or have reached the lifetime allowance (LTA) of £1.85million in 2011/12, reducing to £1.5million in 2012/13 and £1.25m in 2014/15. Any amount over this will be taxed at 55%.
Contributions paid by you to a personal pension plan or a stakeholder pension scheme are made net of basic rate tax (i.e. 20%). This means that for every £100 you want to save, you only pay £80. Tax relief of £20, topping your contribution up to £100, is then added by HM Revenue & Customs (HMRC).
If you are a higher-rate tax payer (i.e.40%), you may able to claim additional tax relief. Depending on how much you earn over the higher rate tax band, any additional tax relief would range between a further 1% up to a maximum of 20%.
From 6 April 2011, if you are an additional-rate tax payer (i.e. 50%), you may be able to claim additional tax relief at your highest rate. Depending on how much you earn over the higher rate tax band, and your level of contribution, any additional rate tax relief would range between a further 1% up to a maximum of 30%.
Do I have to move my pension to the country I live in abroad?
No. This is the biggest misconception. You can live in Canada, Spain, Bermuda or Thailand whilst holding your QROPS in Guernsey. Then, when you wish to draw your pension it can be paid directly into your bank account of the country you are living in or to an offshore bank where you can withdraw the money on an ATM card.
Is my pension kept in Pounds Sterling?
This is the beauty of a QROPS transfer. You can keep your pension in Pounds Sterling or you can change it into the currency of the country you are moving to. So, if you move to Spain for example, you can change your entire pension pot into EURO, so you don’t have to worry about the currency exchange or if you think the Pound will remain stronger, you can keep your pension in GBP and then take advantage of the exchange rates at a later date.
In fact, you can hold your pension in multiple currencies if you wish, GBP, USD, CHF, EUR, Swedish Krona, for example.
I have many pensions in the UK. What do I do?
A QROPS allows you to transfer all your pensions into one place where it will be easily manageable.
Can I get a 100% lump sum or cash in my pension?
Typically the answer is no, unless there are extenuating circumstances like a terminal illness. Guernsey & Isle of Man allow access to a 30% lump sum once you have been offshore for 5 years.
When can I draw an income from my pension?
You need to be 55 years old and offshore for 5 tax years before drawing your pension. You can take a 30% lump sum upon transfer. If you need money before 55, you can also get a loan against the value of your QROPS. After 5 years there are no longer any reporting requirements to HMRC.
What taxes do I pay on my pension under QROPS?
- No More UK Income Tax
- No Capital Gains Tax
- No Dividends Tax on UK Shares or Funds
- No Inheritance Tax
What returns will I get on a QROPS?
The returns depend on your investments. They are no longer linked to inflation directly.
You can invest in bonds, shares, mutual funds, ETF’s, cash, fixed interest account. Your options are open. A sensible IFA will direct you to protect the majority of your pension with low risk investments and investments which have little or no correlation to the stock market. Younger clients and those who wish to take more risk can expose some of their pension to equities and commodities such as gold, silver and oil. A typical return after all charges have been taken into consideration could be 7.5% p.a.
QROPS Vs UK Pension Examples. Pension Tax Relief
John is 45 and has a £70,000 pension pot. He moves to Spain.
UK Pension pot at 65 @2.5%* p.a. return: £114,703
He draws a pension at 6%. This gives him £6,882 pension income per year, so pays no income tax. If he dies after withdrawing his pension, his wife would most likely receive half, a pension of £3,441.
QROPS Pension pot at 65 @6% p.a. return: £224,499
He draws a pension at 7% (as he can withdraw up to 120% of GAD rates**). This gives him a pension of £15,715 per year. He pays no UK taxes. If anything happens to him, the wife receives the entire lump sum tax-free. He pays Spanish income tax on the pension if he transfers this money to a bank in Spain and declares it to the Spanish tax authorities. He could also pay this pension into an offshore account and withdraw money using an ATM card.
* Assumes pension increases with inflation at 2.5% return. The ave. CPI 1996-2011 is just under 2% according to http://www.statistics.gov.uk/statbase/tsdataset.asp?vlnk=7174&More=Y
**The Government Actuary Department (GAD) drawdown tables are used to determine the basis amount which represents the value of comparative annuities on a standard single life, level with no guarantee basis. http://www.hmrc.gov.uk/pensionschemes/gad-tables.htm
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Pension tax relief for Dummys article written by Richard Malpass at QROPS Specialists.