Expats who want to take a lump sum from their pension on retirement have an extra option that could boost their tax-free cash.
Drawing a lump sum may not suit every expat – but those who have decided to take the money can increase the amount by up to a fifth with some smart financial planning.
Some rules apply – for instance the retirement saver must live permanently outside the UK or have plans to do so within the next six months.
This includes workers living in other countries who have spent some time in Britain and who have contributed to a private or workplace pension scheme.
Like any other pension, they must also have reached the age of 55 or over.
Drawing your lump sum
Once the move overseas is underway, the expat can speak to an international financial adviser about a Qualifying Recognised Overseas Pension Scheme – pronounced as a Queue-Rops.
These special schemes monitored by HM Revenue and Customs (HMRC) allow retirement savers with UK pension rights to move their funds to one of more than 3,000 QROPS in 46 different countries.
Once the pension transfer has been made, many QROPS pensions let retirement savers take a tax-free lump sum of up to 30% of the pension transfer value plus any growth in the fund.
The 30% tax-free lump sum comes from QROPS rules dictating the provider must ring fence 70% of any tax-relieved contributions to pay pension benefits in the investor’s old age.
The tax-free amount depends on the financial centre where a QROPS is based.
Some offer the same 25% as the UK, while others offer up to the 30%.
Favourite destinations are Malta, the Isle of Man, New Zealand and Gibraltar, which all pay 30% of the transfer fund value as a tax-free lump sum.
Points to watch
Some important points have to be considered before and after making the transfer.
Transferring out of some UK workplace schemes may mean losing other benefits that cannot be replaced by a QROPS.
Once the transfer is made, taking a tax-free lump sum reduces the size of the fund, and the regular payments from the pension.
Even in the UK, a £100,000 pension fund buys a £500 a month annuity, but taking a 25% tax-free lump sum reduces the fund to £75,000, which purchases an annuity paying £375 a month.
Some QROPS, especially in Malta, let investors draw their lump sum as several small payments over a long period, which lets the remaining fund grow while releasing a lump sum as required.