We have previously reviewed the features and main advantages of overseas pensions. Such retirement plans are of particular interest to those expatriates who now live in Denmark, France, the Netherlands, Sweden and Switzerland. Here, we look at the benefits in more detail and see how a qualifying overseas scheme is especially beneficial as part of wealth management and retirement planning.
Why Consider a Pension Transfer?
If you are an expatriate who now lives in Europe, it might well be advantageous for you to transfer your retirement fund offshore, instead of leaving it locked in the UK. The resulting benefits such as improved flexibility and more generous tax treatment are clear, but did you know that there are other grounds to organise a pension transfer?
Significantly, personal finances are more straightforward when the benefits are payable in local currency; there are no headaches with fluctuating exchange rates. Furthermore, inheritance arrangements are much less complicated, providing peace of mind during a difficult time.
QROPS vs. UK Pension Comparison
Life expectancy has lengthened over recent decades, so adequate retirement provision has come into focus. As part of a successful wealth management strategy, it is important to appreciate the differences between UK-based private pensions and their overseas counterparts.
With UK pensions, the range of investment options is less diverse. In contrast, overseas plans offer a wider choice of investments, ranging from conservative to adventurous. Additionally, it is not necessary to purchase an annuity, i.e. a monthly or annual income plan. Notably, the Chancellor also removed this latter constraint from UK pensions in the 2014 Budget.
Planning is crucial after the tax-free lump sum of 25 or 30 per cent (depending on the QROPS residence status and tax regime applicable), as the remainder could attract tax at up to 40 per cent in the UK. Levied on a small fund, say £35,000, the higher rate of income tax would see £14,000 payable to Her Majesty’s Revenue and Customs (HMRC), leaving only £21,000 available.
Fortunately, overseas plans allow payment of income in a more tax-efficient way. Additionally, for sizeable funds of more than £1 million, there is no lifetime allowance tax charge.
Avoid Exchange Rate Complications
With an overseas plan, depending on the plan and provider, it is possible to receive payments in the currency of one’s choice. Similarly, the present uncertainty surrounding Brexit has shed doubts over whether the 25 per cent pension exit taxation will apply to pension funds outside the UK but within the EU. Such questions mean that expert financial knowledge is essential; the right decisions could make a significant difference in safeguarding one’s future.
Pass On Benefits
With UK–based pensions, retirees can take benefits from age 55 though in cases of ill health, it may be possible to agree earlier payment. Subsequently, for fund holders who die before age 75, the proceeds are usually tax-free. After the age of 75, however, the sum is taxed at the beneficiary’s marginal rate of UK income tax, currently as high as 45 per cent. Conversely, with overseas plans, there is no UK tax charge on death, so all the fund goes to the beneficiaries.
Finally, there may be protection of the fund from creditors and in divorce cases.
Here at Belgravia Wealth Management, we will be delighted to help if you are contemplating a pension transfer to replace your existing plan. Our expert pensions advice is entirely confidential.