Box clever to avoid tax on offshore pensions

Box clever to avoid tax on offshore pensions
29 February 2012

FROM April 2006, it has been possible for individuals who have built up UK pension rights but are non-resident for tax purposes to move their pension benefits out of the UK to a qualifying recognised overseas pension scheme (QROPS).

There are big benefits of switching to a QROPS – such as tax savings, inheritance tax planning and investment control.

However, forthcoming rules changes could lead to a big tax hit. Let’s look at some of the advantages – and how the changes affect offshore pension planning...


A QROPS can have significant tax advantages for those retiring abroad, compared to simply leaving your pension fund in the UK.

If you choose the correct QROPS jurisdiction then the pension income is not subject to tax at source but in the country in which you now reside. In many countries, especially those in the Middle East, there is very little or no tax to pay on pension income.

Up to 30% of your pension fund can be paid out as a tax-free lump sum (rather than 25% in the UK).

When you die, your family can receive your pension fund as a tax-free lump sum (avoiding a tax charge of up to 55% that applies to UK pension funds).

These tax advantages only apply to those who have been non-UK resident for five complete tax years, which is commonly known as the ‘qualifying period’. Those who are UK resident or who are still within five consecutive tax years of leaving the UK will be restricted to 25% of the original transfer value as tax-free cash and will be subject to broadly the same taxation on death as those in a UK registered pension scheme.

Before transferring to a QROPS you must make sure the scheme you choose appears on the HM Revenue & Customs (HMRC) list of recognised QROPS in order to avoid tax penalties.

Proposed changes

On 6 December 2011, HMRC released a consultation document in relation to QROPS as part of the 2012 Finance Act. These changes were aimed at making QROPS rules tighter so that no abuse can occur and are due to be passed into law on 6 April 2012.

Once these rules are passed, one of the many changes is that your QROPS provider will have to report all payments made from a QROPS for ten years from the date you transfer out of a UK registered pension scheme. Any distribution from a QROPS within those ten years must be reported to HMRC within 60 days.

This reporting is a provision of information only and in no way governs the tax treatment of benefits, but you could be caught in the tax net if you have not met the above mentioned qualifying period or if you subsequently return to the UK and become UK resident for tax purposes.

Anyone becoming non-UK resident who intends to remain non-UK resident throughout retirement will have to plan much further in advance than before. Once of the key areas you should consider is your intended retirement destination and double taxation agreements as correct application of these within your QROPS can give massive tax advantages.

Retirement planning for non-UK residents is a complex area of advice with large tax consequences for getting it wrong. Expert advice from a pension specialist is essential.

Pic credit: Ambro/

Will you be affected - or do you know someone who will be? Tell cashy...


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Financial planner and pension specialist
Acumen Financial Planning
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