This article is helpful to current British expats or expats returning to the UK who hold a Gibraltar QROPS having transferred from a British pension.
Background: Gibraltar QROPS have been a popular recommendation for British expats that wanted to move their UK pensions out of the UK. One of the attractions of Gibraltar QROPS was the low rate of tax deducted from income (2.5%) during retirement, which was of interest to those British expats living in countries with unfavourable or no Double Tax Treaties.
Double Tax Treaties
The relevance of Double Tax Treaties is important to understand, as some British expats living in some countries could be taxed twice if they retained pension in popular QROPS locations like Malta or retained the British pension in the UK. While Gibraltar tax on pension income is currently 2.5%, which is unavoidable, this could be better for residents in some jurisdictions if that is what the Double Tax Treaty dictates.
However, there has always been an issue with holding a Gibraltar QROPS. For example, where someone has lived in a place with Double Tax Treaties with the UK, often there has been no double tax to pay and the individual can select sometimes where they pay their tax. With the UK not charging tax on income until the marginal rate, this means it has often only been worthwhile considering a transfer if the pensions were over £150,000 in value(it tax is the issue- costs and fees are another issue).
Further, some countries like South Africa allow for pension income to be untaxable. Therefore, advice on a Gibraltar QROPS has always been required, especially due to the increased cost of holding one and the fact there is no tax treaty with South Africa but there is with the UK.
We regularly get enquiries from expats that plan to return to the UK, and some have Gibraltar QROPS.
A professional advice firm, before recommending moving any pensions from the UK, will ask detailed questions about the plans of the expat for the future. A key question is ‘Where do you plan to retire?’ Many we speak to are either not sure yet, or plan to retire in the UK. However, when we ask those that have transferred to QROPS and are planning a return to the UK for their retirement, we are told that this question was often never asked of them. In fact, they were told that being abroad meant a QROPS is the right thing to do in all cases.
Without going into detail about the previous advice these people received, what options do such expats have upon the return to the UK?
Many may benefit from repatriating their QROPS to a UK pension, the fees are lower and the client has all the benefits of the UK regulatory regime going forward. Many, who have been recommended QROPS are locked into costly insurance bonds and repatriation may initially be costly. This is due to the high commissions taken by the initial adviser that has to be recouped from the clients’ funds- albeit over the longer term shows that it is often better to take this hit now, than suffer years of high fees in the future. Of course, each case needs analysis
Gibraltar QROPS- Returning Expats
In 2015, the UK introduced new pension freedoms and this extended to a number of QROPS jurisdictions, but not Gibraltar.
While many have been sold the idea of flexibility by transferring to a Gibraltar QROPS, even if they planned a UK retirement, they may find that a repatriation to the UK is possible but with an important restriction.
Gibraltar is not a jurisdiction that can offer Flexi Access Drawdown (FAD) and has left the 70% rule in place. Therefore, Gibraltar QROPS remain subject to actuarial limits on income drawdown. After taking a lump sum, 70% of the fun must remain to provide an income for life.
While an income for life is the primary purpose of a pension, this may not suit many investors who have genuine reasons to consider FAD and will have lost this opportunity.
In addition to this the Gibraltar Income Tax Act 2010 s.14B (3) provides that approval will only be given by the Commissioner where the rules which irrevocably bind the pension fund prevent:
This means the member cannot transfer to another scheme that offers benefits more generous than those of the current scheme, i.e. cannot take out more than 30% of the fund.
We understand that the Gibraltar Tax office will allow a transfer to another pension ( i.e. UK in this case ) as long as the receiving scheme and the member both sign a deed of indemnity confirming that none of the above 3 conditions will be requested.
Gibraltar QROPS- Take income in the UK
If you take income in the UK you will be taxed by Gibraltar and will have to apply to have this offset. You cannot claim it back and in some cases this could have the effect of adding 2.5% charges to the fund (by way of the tax applied) for those within the UK annual allowance.
Gibraltar QROPS- Summary
Expats that are recommended Gibraltar QROPS need to think very hard about-
- Where they plan to retire
- Whether flexible benefits are important, or could be in the future.
There is a very limited reverse gear, once transferred to a Gibraltar QROPS so don’t do it unless you know what your plans are. Just remember the costs involved in transferring and the hassle. The cost being many more times than a UK equivalent pension if someone makes a decision to transfer to a Gibraltar QROPS without seeking proper regulated advice.
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
This article was published on 22nd November 2017
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