If you are a Brit and have moved (or plan to move) to Australia from the UK, you will likely have heard about Qualifying Recognised Overseas Pensions, or QROPS for short. QROPS arrangements are often cited as the ideal solution for UK based pension funds: you get to move your money to Australia, and take tax free income as a pension. The reality is not quite as clear-cut.
Tax-benefits in, tax-free out
The Australian pension system works in a very different way to its counterpart in the UK. In the UK, residents paying into a pension scheme do so with tax relief on their contributions but any income taken is liable to income tax. Here in Australia, it’s the other way round: the main advantage is no tax liability upon withdrawal of pension income from accumulated super funds.
For retiring Brits, this presents an enormous benefit: if the pension pot could be transferred into an Australian scheme, not only would a major portion of tax have been avoided while the fund is being accumulated, but tax would also be avoided when income is taken.
As with any financial instrument though, the reality is not quite as simple.
Don’t fall foul of the law
If you are British and have ever had dealings with the taxman (HMRC), you’ll know that his reach stretches farther than the long arm of the law. When it comes to pensions, the taxman is not going to make it easy for you to avoid paying him what he thinks he is owed. Hence, there are a range of laws which govern what you can do with your pension fund when moving abroad. Fall foul of these and you could lose more than half of your hard-earned nest egg.
If you transfer your pension funds illegally to a non-QROPS scheme, be prepared to pay between 40% and 55% of the amount transferred to the UK taxman.
Make sure you use a QROPS
The first item on the HMRC’s tax grabbing agenda is to stipulate what type of scheme you can transfer your money into. In order to be a recognised scheme, there are certain standards and conditions which the QROPS has to meet. These include:
- You must be able to influence how your pension fund is invested
- A wide range of investment assets must be available to you
- The scheme is not able to loan money to you
- The scheme is registered with the HMRC
There are also rules concerning documentation, reporting, and payments from the scheme.
If you are told you can access 100% of your fund as a lump sum and without paying tax, beware: this simply is not true, and you will find yourself with a large tax liability.
Fortunately, the HMRC keeps a list of recognised QROPS schemes which you can access by clicking here.
QROPS Transfer regulations are changing
At present you can transfer any personal pension to a QROPS (provided it is valued at more than £50,000). However, after 6th April 2015, certain pensions will be prohibited from transferring into a QROPS. If you have a funded defined benefits (final salary) scheme you will still be able to transfer into a QROPS, but if you have an unfunded defined benefits government scheme (such as an NHS pension, Police, or military) you will no longer be able to transfer this fund to a QROPS.
Neither can you transfer your UK state pension into a QROPS, nor a defined benefits scheme from which you have already started taking benefits.
Benefits of transferring to a QROPS in Australia
If you transfer your pension to a QROPS and invest within an SMSF structure, you’ll benefit from a wide array of advantages including:
- You won’t pay tax on the transfer (providing it is less than the Non-Concessional Contributions limit)
- You’ll be free to invest your pension pot as you see fit within certain guidelines
- Easy reporting structure after five years
- You won’t pay tax on income received
- Estate planning is simplified
- You will be protected against possible future creditors
Do you qualify for a QROPS?
Before you can make the switch, you’ll need to qualify to get the benefits of QROPS:
- You’ll need to be aged between 18 and 75
- You’ll need to expect to live in Australia for at least 12 months
Be warned that if you intend to return to the UK and resume residence there, you could be liable for a 40% tax demand on your fund.
Seek advice now
If you have UK personal pensions and are taking up residence in Australia, transferring to QROPS should be one of the first things on the list of your financial goals. However, to make certain you achieve all the benefits and don’t open yourself to any of the potential pain when doing so, you should seek professional advice.