By Jeremy Woodley
The April 2015 pension reform changes have already had a significant impact on expatriates who wish to access their pensions while retiring abroad. We explain below how these changes could affect you by combining our financial expertise with real-life frequently asked questions.
I’ve been advised to take a Qualifying Recognised Overseas Pension Scheme (QROPS) as a result of the 6 April reforms. Is this the best option for me?
Transferring a pension pot to a QROPS might be considered when an individual permanently lives abroad. Taking part in this HMRC scheme gives pension-savers the freedom to enjoy the privileges of their pension while attracting UK tax relief, with more control outside of the UK jurisdiction. A QROPS also helps to eradicate foreign exchange rates meaning that the pension’s value will not rise and fall with the pound.
It is however, important to be cautious when considering the transfer to a QROPS as there are a number of rules that apply. Failure to comply may result in disproportionate tax charges that can be prevented if financial advice is sought.
What are the April changes to flexible pension drawdown and do they apply to me outside of the UK?
As a result of the April pension changes under the flexible pension drawdown scheme, the previous restrictions that determine an individual’s eligibility no longer apply. These include limitations to withdrawals as well as having access to a specific amount of guaranteed income. Under the new April reforms, all individuals over the age of 55 with a private pension will be eligible for uncapped access to their pension pots, with a tax-free lump of 25%.
These rules may differ for non-UK residents as the tax treatment will depend on the existence of a double taxation agreement (DTA) between the country of the member’s residence and the UK. In most cases, benefits will be taxed in the member’s country of residence if there is a DTA and, if there isn’t one, generally UK tax rules will apply. We emphasise the need for careful consideration as there may be local tax rules which could be problematic for expats.
What are the changes to defined contribution schemes?
Under the April 2015 reforms, individuals who are members of private sector defined benefit schemes are no longer able to transfer to a defined contribution scheme. In short, this means that expats who are part of unfunded private sector schemes cannot transfer their pension overseas.
Will my state pension be frozen if I move abroad?
This depends entirely on where you relocate to. If you move to a country that has no shared agreement with the UK, then the level of the state pension will be frozen at the point in which you retire. These countries are Australia, South Africa, New Zealand and Canada.
Currently, the UK’s Department of Work and Pensions continues to insist that the British government has no plans to ‘defrost’ its pension policy, however we await to see any policy changes that could be implemented after this year’s election.
It is important to note that the April 2015 changes to pension reforms will affect each pension-saver differently, depending on circumstance. We recommend that you seek advice from a financial adviser who can offer impartial, practice advice that considers each case individually.
See the related article UK Pensions Reforms For Expats – Are You Ready?
Jeremy Woodley is UK Director of specialist expat advisers The Fry Group.