Any expat has the right to move their pension offshore to a Qualifying Recognised Overseas Pension Scheme (QROPS).
HM Revenue & Customs (HMRC) rules allow the transfers, providing the receiving pension meets QROPS rules and has agreed to report pension payments and other financial information to the tax authority.
One of the main rules offshore providers have to meet is the pension age test.
The test only allows a QROPS to pay benefits to a retirement saver who has reached the minimum retirement age – currently 55 years old.
HMRC and The Pensions Regulator in the UK have run a campaign warning expats who want to switch their retirement funds into a QROPS about the risks of pension liberation.
What is pension liberation?
Pension liberation is when a fund pays benefits to someone under 55 years old.
“Some companies market pensions that let savers have early access to their money, generally by borrowing from their fund before they are 55,” said an HMRC spokesman.
“These are pension liberation schemes and often lead to breaking the rules about how money is withdrawn from a pension.
“This early access is rarely in the interests of the saver and can lead to a fine of more than half the value of the amount withdrawn.”
To guard against pension liberation, HMRC has a reporting procedure in place which offshore providers must follow.
Pension liberation red light warning
HMRC has a red and green light response to inquiries about transferring money from a UK pension or another QROPS to a different offshore pension.
The green light confirms that the pension is registered with HMRC and no deregistration notice applies. HMRC also indicates that that the receiving scheme has no significant pension liberation issues.
The red light confirms one or both of the greenlight conditions do not apply.
HMRC will contact the receiving scheme before issuing the red light notice to ask for an explanation about how the pension is run, so a delay in response is often an indicator that HMRC is unsure about a QROPS pension’s status.
The pension provider has up to three months to answer the queries to HMRC’s satisfaction. If no response is received, a red light response is issued.
To understand more about QROPS, follow this link to understand further about Qualifying Recognised Overseas Pension Schemes