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Make your pension pot more flexible

Bill Blevins: British expats living in France could benefit from Qualifying Recognised Overseas Pension Schemes (QROPS)

LAST month I touched briefly on the subject of Qualifying Recognised Overseas Pension Schemes (QROPS) so this month I thought it would be useful to provide more detail on these arrangements for British expats living in France.

When you moved from the UK to France you probably reviewed your wealth management and tax planning to make sure your investments continue to work effectively in France and that you are not paying unnecessary taxes here.

If you did not do this at the time of your move, or did not include your pension arrangements in the review, or if you last reviewed your pension plans more than a few years ago, now is the time to take advantage of recent legislation permitting, for the first time, the opportunity to transfer your pension out of the UK to a regulated, but more generous tax and investment regime.

While most people do review their savings and investment arrangements regularly, many fail to consider their pension funds – perhaps because they know that the UK has historically retained a tight control over them, even if they have left the UK.

However, UK pension funds have become far more flexible over the last few years – but may still mean you are liable for UK death taxes even though you are no longer a UK resident.

However, if you have left or are about the leave the UK it is now possible to transfer most private pension funds into a QROPS.

Deferred pensions, pensions in drawdown and protected rights can all be moved into a QROPS, but you cannot make a transfer if you have already purchased an annuity.

Final salary schemes are only eligible if the pension has not commenced and you cannot transfer your state pension either.

Improving pension income and investment opportunities

QROPS can be more flexible in how and when you take your income. You can vary your pension income to suit your lifestyle and financial requirements within France. A wide range of investment opportunities are available within such a scheme, and with increased control over your fund you can structure it to suit your needs for income and capital growth.

Tax efficiency

Another way to increase your income is of course to pay less tax on it. Your pension can roll up tax free within a QROPS and income will be paid to you gross. You do need to declare it in France, but you can structure your fund so that you pay less tax on it than you would with a UK pension fund.

Removing currency risk

Exchange rate movements between the pound and the euro can affect how much pension income you receive each month. While sometimes the exchange rate moves in your favour, as we have seen over the last few years more often than not you end up with less in your pocket. You may also be paying exchange rate costs.

With a QROPS you can choose which currency your fund is denominated in and which currency you receive the income in. This can be pounds, or euros, or indeed any major currency. By holding all or a substantial part of your fund in euros you will no longer be at the mercy of currency exchange rate gyrations. If you want to give the exchange rate the opportunity to improve before you change currency, you can set up your fund in pounds and transfer to euros at a later date.

Avoiding the annuity trap

Under current UK legislation, you must either buy an annuity by your 75th birthday or be transferred into an Alternatively Secured Pension (ASP). Annuities are increasingly considered inflexible and annuity rates are currently very low and seemingly set to stay this way.

When you die the balance of your fund dies with you – you cannot pass this asset onto the next generation. Other than perhaps a spouse’s/dependent’s pension, there is nothing to leave your family.

With the ASP alternative you would receive lower levels of income than you did when you were in drawdown.

While you can leave the balance to your family, it comes at a very high price – the tax charges on death can be as high as 82%.

Despite the promises of certain politicians, if you transfer your pension into a QROPS it will not matter who wins the next UK General Election because with a QROPS you never have to buy an annuity, which means you may be able to leave your family a larger inheritance.

Avoiding UK death taxes

If you have taken any benefits from your UK pension fund and have not bought an annuity, it will be potentially liable for a tax charge on death of 35% before the age of 75 and up to 82% after age 75.

This also applies to non-UK residents and even to non-UK domiciles. Unlike with inheritance tax, there is no exemption between spouses.

However, if you have transferred your pension into a QROPS, and provided that you have been non-UK tax resident for five complete and consecutive tax years at the time of your death, your fund will escape all of the UK tax charges entirely.

While transferring your pension funds into a QROPS can provide many benefits, it will not necessarily suit everyone, so do make sure you understand all the implications before you decide to go ahead.

For those whose pension funds total less than £75,000, a move to QROPS is unlikely to be worthwhile. You should also make sure the scheme you choose is approved by HM Revenue & Customs and follows the UK legislation which allows pension holders to transfer out of the UK and into a QROPS.

It is vital in pensions matters to ensure that you are discussing your requirements with an adviser formally qualified to deal with complex pension matters.

Make certain that you carefully investigate the credentials of anyone providing advice before proceeding.

This column is written by Bill Blevins of Blevins Franks financial advice group (www.blevinsfranks.com) who has written for the Sunday Times on overseas finance for the last 10 years. He has broadcast regularly on BBC radio and is the co-author of the Blevins Franks Guide to Living in France. This column is exclusive to Connexion

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