Have you been mis-sold an offshore pension?

Have you been mis-sold an offshore pension?
01 July 2012

COMPANIES in Dubai are aggressively pursuing UK expats in a bid to convince them that they need to move their UK pension offshore – into a qualifying recognised overseas pension scheme (QROPS). By the sounds of it, a lot of expats are taking their advice.

However, while a QROPS can be a suitable vehicle for your pension in certain specialised circumstances, the chances are you probably don’t need one – and would be far better off with a self-invested personal pension (SIPP), or possibly even staying with your current UK pension provider.

What’s more, if you don’t need a QROPS, you certainly don’t want one because the charges are roughly twice the amount you should be paying for your pension vehicle. Ultimately, this will lead to less income and a reduced quality of life in retirement.

Let’s take a closer look at these issues...

Retirement funds

The argument put forward for using a QROPS is the ability to crystalise your pension and use only 70% of the transferred amount to provide an income in retirement; the rest can be taken as a lump sum. However, if you are using your pension to fund your retirement, why should this be necessary?

QROPS jurisdiction

You could also run into complications if you transfer to a QROPS in one jurisdiction, but wind up retiring elsewhere. The QROPS jurisdiction right for you is one that has a double taxation agreement with the county you retire in.

If you are in your 30s, 40s or even 50s working in the UAE, can you honestly predict accurately where you will retire? It is important to get it right, because getting it wrong could result in you forking out many thousands of pounds in tax that could easily be avoided.

To give you an example, Malta is currently being lauded as the new QROPS destination of choice following Guernsey’s demise, and there is some merit to this. Malta can be an excellent QROPS destination for many people as it has many double taxation agreements in place.

However, it does not have one in place with Thailand. So, if you have been sold a Malta QROPS and end up retiring to Thailand you could end up having to pay tax on your income in Thailand in addition to tax under Maltese tax law of up to 35%. This means you could ultimately have to pay total income tax charges of 48% in two countries when you should only be paying tax in your country of residence.

This is totally unnecessary and completely avoidable – by only entering into a QROPS near to your point of retirement when you know where you are going to be based. You will, however, have to report all payments made from a QROPS to HM Revenue & Customs for ten years from the date of transfer due to new rules that came into force earlier this year.

In the meantime, you will get the same benefits from using a SIPP and a significantly reduced cost. If you did end up in a similar situation to the one outlined above, you could move your QROPS, but many providers will charge (often hefty) fees for this privilege.

Inheritance tax planning

Another argument put forward for QROPS is that they are inheritance tax (IHT) exempt both pre- and post-retirement. However, a SIPP is also IHT free pre-retirement.

So clearly, the best path to take, for most people here in the UAE – and UK expats worldwide – is to use a SIPP now and consider whether a QROPS is right for you when you’re approaching retirement.

This way, you will avoid IHT entirely, be in a better position to choose the right QROPS jurisdiction and pay significantly lower charges.

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Pic credit: freedigitalphotos.net

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Chartered financial planner
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