International IFAs tend to talk in jargon, so as an expat, if you want to understand what is going on you need to know your QROPs from your LTA.
To help, here are some common QROPS terms explained:
- Qualifying Recognised Overseas Pension Scheme (QROPS) – an offshore pension plan for British expats or international workers who have pension rights in the UK.
- ROPS – Lately the ‘Q’ has been dropped from QROPS. A ROPS is a recognised overseas pension scheme. All QROPS are ROPS, but other pensions can be ROPS as well
- Lifetime allowance (LTA) – The maximum amount a retirement saver can hold in their pension. The limit for 2015-16 is £1.25 million and this falls to £1 million in 2016-17.
- Benefit crystallisation event (BCE) – A withdrawal of funds from a pension, such as a transfer from a UK pension to a QROPS.
When this happens, the size of the pension fund is tested against the lifetime allowance.
If the fund is larger than the current LTA, then tax penalties starting at 40% of the transfer fund value are imposed.
- Annual allowance – The maximum amount a retirement saver can contribute to a pension in a tax year. In 2015-16, the allowance is £40,000, but from 2016-17, for those earning more than £150,000 have their allowance tapered to £10,000.
The £10,000 allowance applies to anyone earning £210,000 a year or more.
- Pension age test – The rule change that saw thousands of QROPS delisted in 2015. The test states that a QROPS must not pay benefits to anyone under the age of 55 years old unless exceptional circumstances apply
- Tax-free lump sum – The amount a pension saver can withdraw from their fund without incurring income tax.
In the UK, this amount is set at 25% of the fund, but some QROPS will pay up to 30% of the fund value tax-free.
- Third party QROPS – These are pensions hosted in one financial centre that allow the retirement saver to live elsewhere.
These pensions are useful for retirement savers living in countries that have no local QROPS providers, but who still want to take advantage of the tax effective solutions switching cash offshore can offer.
These QROPS are available in several centres, including Malta, Gibraltar and the Isle of Man.
Hopefully, with some of the jargon under your belt, you can discuss your QROPS on equal terms with your independent financial adviser – that’s an IFA, by the way.