During our working lives we build up our pensions nest-egg to enjoy in retirement and free us from financial worries.
“It’s Vitally Important To Get The Most Out Of This Hard-Earned Pension Pot! …”
Let’s now try to cut a swathe through this impenetrable pensions jungle and explore one valuable option – QROPS – that has recently been made available courtesy of the UK Govt’s HM Revenue & Customs (HMRC).
HMRC had to make this an option as a member of the EU …
Your Pension and Retirement Income
When placing your money into a UK personal pension you receive tax relief on the contributions at your normal rate of income tax.
However, when you start to draw the benefits in retirement you will be taxed on at least 75% of the pot that you have built up as if it were earned income.
Depending on how you choose to take the benefits from your personal pension pot, once those benefits have started, your beneficiaries will either get nothing upon your death or the remainder of the pot less a 35% tax charge.
There are similar restrictions with company pension schemes, although they vary depending on the scheme terms.
A New Way …
It can be arranged for your pension pot to be accessed in a different way via QROPS.
The HMRC Reporting Period commences when the person leaves the UK and not when the pension is transferred.
Under regulation 3(3) of SI 2006/208 a QROPS will not have to report to HMRC a payment (or a deemed payment) if the member is not tax resident in the UK when the payment is made and has neither been UK resident in that tax year nor in any of the previous five tax years.
Most Qualifying Recognised Overseas Pensions Schemes will then allow you to nominate what you wish to do with this money.
The ‘Spirit for which QROPS was intended’ must prevail throughout. Gaining full access to the entire fund is not a legal option and money that is transferred into a QROPS arrangement is not wholly accessible. You cannot ‘do as you wish with the money’ as the QROPS arrangement is still, and always will be, a Pension Scheme.
Individuals have far greater flexibility when in a Qualifying Recognised Overseas Pensions Scheme arrangement, however, gaining full access to the funds after the 5 year reporting period is certainly ‘trust busting’ which caused Singapore to have their QROPS approval withdrawn, with tax consequences.
Even if a member has not been out of the UK for the full 5 tax years, he can still take benefits out of the Qualifying Recognised Overseas Pensions Scheme, within the limits of a maximum 30% Cash, with the remaining 70% to provide ‘an Income for life’. If however he takes benefits which exceed those that he would have achieved in the UK (i.e 25% Tax Free cash) then HMRC, when it is reported to them within the first 5 years, could deem the excess 5% cash to be an ‘unauthorised payment’ and levy tax at the rate of 55% on it, but only on that 5% excess.
For example, an individual moved to the Costas two years ago. After careful consideration, he then chose to transfer his pension fund into a Qualifying Recognised Overseas Pensions Scheme, partly because he wanted more control over where his money is invested.
He also liked the idea that his QROPS could pass on to his chosen beneficiaries without probate, sometimes a very lengthy process.
It is the Pension Administrator of the Qualifying Recognised Overseas Pensions Scheme and not the Member on whom the liability rests to report to HMRC any ‘event’ (payment of any benefits) which occurs if the member is not tax resident in the UK when the payment is made and has neither been UK resident in that tax year nor in any of the previous five tax years.
Tax treatment is favourable in Spain, France, Portugal and, indeed, most of the EU. There is no tax to pay unless withdrawals are taken and the pension can be structured in such a way so that minimal local taxes are paid.
Solving Exchange Rate Dilemma
The Euro is the home currency for those living in Spain, therefore, sterling is not the currency of choice.
We have seen sterling pension income fall by 16% in the last 12 months simply because of the exchange rate fluctuation.
This is quite a big pay cut!…
Would you like a free fact sheet and guide to Qualifying Recognised Overseas Pensions Schemes? … Just fill in the simple form you’ll find on our main financial services in Spain page … or ask him any other financial questions you have.
Check out also other financial articles written by Robin, by clicking on the links below …
- The Spanish Inheritance Tax (Guide & Advice)
- Ten Best Investment Ideas in Spain
- Spanish-Approved Investment Bonds (Part 2)
- Spanish-Approved Investment Bonds (Part 1)
- Qualifying Recognised Overseas Pensions Scheme (QROPS)
- Protecting Your Spanish Savings (Secure Your Future)
- Making a Spanish Will (Advice for Expats)
- Investing is Like Golfing (Free Financial Tips)
- Income Investing in Spain
- Deposit Account Alternatives in Spain