Make the most of investment income
QROPS can be of real value for British expatriates resident in France
THE international pension arrangements known as QROPS (Qualifying Recognised Overseas Pension Schemes) can be of real value for British expatriates resident in France.
A QROPS offers a number of attractive advantages, including tax efficiency, the potential to improve your income and more investment choice.
UK pension funds remain under UK rules, even if you have retired in France. They also remain liable to the UK charges on death, even though you are no longer UK tax resident.
If you are living in France, or indeed anywhere outside the UK, and have UK private pension funds, then you may be able to take advantage of a QROPS and escape the UK restrictions on pensions. If you have several pension funds, they can all be consolidated into one QROPS, making it easier for you to manage your pension assets in future.
Many pension schemes qualify, including protected rights and final salary schemes if you have not yet begun to take benefits. You cannot however transfer an annuity in payment; a scheme pension (such as a final salary scheme) or a UK state pension.
The tax treatment of QROPS in France depends on whether the income is taxed as a pension or as an annuity.
If the income is taxed as annuity then a major portion (between 30 and 70 per cent) is tax-free, depending on your age at the time the annuity began. The liability to social charges is also reduced by the same amount.
A QROPS is not liable to French succession tax when it is left to your spouse or to a direct line heir. It is very important to take professional advice before you set up your QROPS.
A WIDE range of investment opportunities are available within a QROPS and you can structure them to suit your needs for income and capital growth in France. Once you have been non-UK resident for five years, you can potentially have access to a higher and more flexible income, although the pension must be structured to be able to pay you an income for the rest of your life.
You also have access to a lump sum (currently up to 25 per cent, though some providers may be able to increase it to 30 per cent for those who have been non-UK resident for five years) if you have not previously taken the maximum from your UK pension before it was transferred.
Since the French tax authorities currently only tax periodic receipts, such a one-off lump sum is usually tax-free in France. However this may change in future, so you would need to seek advice at the time.
QROPS can provide many benefits for expatriates as well as for your family when it comes to inheriting your fund. If you are non-UK resident or about to leave the UK and have one or more UK private pensions, it is certainly worth
considering a move into QROPS.
QROPS, however, do not necessarily suit everyone, so it is important to take professional advice and understand all the implications before you go ahead. For those whose pension funds total less than £100,000, QROPS is unlikely to be cost-effective.
You should also make sure that the scheme you choose is approved by HM Revenue & Customs and follows the spirit of the UK legislation which allows pension holders to transfer out of the UK and into a QROPS.
UK pension transfers are heavily regulated by the UK Financial Services Authority (FSA), so it is important to only take advice from a wealth manager who is authorised and regulated by the FSA for the conduct of pensions and investment business.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based on our understanding of current taxation laws and practices, which are subject to change.
Technical information has been summarised; an individual must take personalised advice.
Avoiding death charges
The UK draft legislation for the Finance Bill 2011 was published in December and confirmed that, from April 6 this year, pension drawdown funds will no longer be subject to UK inheritance tax.
It also confirmed that the unpopular alternatively secured pensions (ASP), with their 82 per cent tax charge on death, will be scrapped.
Under current legislation, you have to either buy an annuity by age 77 or be transferred into an ASP.
From April onwards, there is no time limit to buy an annuity and you may not need to buy one at all. Instead you will move into either “flexible drawdown” (provided you have a minimum of £20,000 secured lifetime pension income) or “capped drawdown”.
While currently the tax charge on death for those in income drawdown is 35 per cent, from April it increases to 55 per cent. This means that your heirs will receive less than half of your pension pot when you die.
If you can transfer your pension funds into a QROPS, after you have been non-UK resident for five complete and consecutive UK tax years, your funds will escape the UK death charges. If you have already been tax resident in France for the five years, then your funds are immediately exempt from these taxes, if transferred.
Choice of currency
QROPS provide more flexible currency options and can be established in sterling or euros (or indeed any currency) and are therefore capable of removing the currency issue from your pension fund for ever.
You can convert the pension assets into euros and so receive income in your local currency without being at the mercy of the prevailing exchange rate. You will also no longer have to pay exchange rate costs.
It is usually possible to switch currencies, so you can set it up in sterling and change it to euros at a later date, for example, if you expect the sterling/euro exchange rate to improve in future.
Likewise, if you eventually return to the UK, you can switch it from euros into sterling.