QROPS SIPPs and DIY Investing Explained
So you’ve moved abroad and started thinking about your pension. You contact those companies you know in the UK and find they don’t accept expats. You google pensions for British Expats and QROPS appears.
In this article we look at the key things you should know about QROPS.
We look at how they are similar and different to SIPPs and explain why DIY investing often makes sense for expats.
What is a SIPP?
Before we talk about QROPS, it is worth mentioning the SIPP, which stands for Self-Invested Personal Pension. This is a pension wrapper used to save/invest with 20% tax relief for a UK resident.
There are plenty of reputable SIPP providers in the UK. However, I’m sure it goes without saying that people who live abroad aren’t usually classed as UK resident. If you aren’t UK resident you won’t usually be eligible for the tax relief.
You can check out the HMRC statuary resident test if you aren’t sure about your resident status.
Expats can keep their SIPPs when living abroad. However, a SIPP without tax relief isn’t really a SIPP! Consequently, some investors transfer their SIPP to a QROPS when they move abroad.
What is a QROPS?
Basically, a QROPS is a pension that is transferred from a UK pension scheme to an overseas pension scheme.
QROPS stands for Qualifying Recognized Overseas Pension Scheme. It is something similar to a SIPP but based outside the UK. In fact, QROPS can be based just about anywhere.
Though a QROPS is recognized by the HMRC, all it really needs to do to become a QROPS is meet HMRC criteria. Sounds good, but it isn’t as good as it sounds.
The bottom line is that it is a self certification process, rather than a process where the HMRC is involved. As a result, you must do your due diligence and speak to a good financial advisor if you are considering a one.
Unfortunately, it is pretty common knowledge that expats (especially British) are often exposed to unscrupulous practices. Here are three articles worth reading if you aren’t aware of this.
Telegraph Article, Bloomberg Article, FT Advisor Article
There are some benefits with QROPS. Like the ability to take up to 30% of your fund in a lump sum, receiving your pension in the currency of your choice, and depending on where you live and where the jurisdiction of your pension scheme lies, the growth of the fund can be tax free.
Another big benefit is related to the lifetime allowance (LTA). In the UK your tax sheltered pension is generally limited to £1,030,000 at the time of writing, although there are some exceptions.
Usually, amounts above that limit will be taxed up to a whopping 55%. If you’re a multimillionaire that kind of tax is worth avoiding!
If you transfer your pension to a QROPS you are assessed when you move the money. Whether or not you surpass the LTA is assessed only at the point at which you transfer. This means you don’t pay any LTA tax at transfer if is less than the LTA and then once in a QROPS, it is not tested again.
But hold on because this advantage isn’t quite as good as it used to be. Mainly due to a new piece of legislation introduced in 2017. There is now an additional 25% tax upon transfer, although there are some situations where you aren’t liable for this tax.
If you and your QROPS are in the same jurisdiction, or your employer is a multinational who participates in the scheme you may not pay the tax.
If you fall into one of these categories and you have a sizable nest egg, this option may just make sense. It will depend on where you reside and the jurisdiction of the pension in question. Just make sure you employ the services of a good financial adviser. Not doing so, could cost you a lot.
If you have a SIPP or other UK pension, don’t have a pension pot near £1 million, and are likely to be liable for the 25% transfer tax, you are probably better off just sticking with your existing pension.
And for investors without a UK pension, it is definitely worth considering a DIY investing approach.
What is DIY investing?
DIY investing means using a broker to invest in stocks and bonds yourself. SIPPs and QROPS are really just investing with tax benefits anyway. It used to be difficult and expensive to invest yourself, but that isn’t the case anymore.
As an expat you don’t usually pay tax on capital gains (unless you are selling a house) in the UK. On top of this you are eligible for the UK income tax personal allowance. So unless you are loaded you can DIY invest pretty much tax free anyway.
The other two options we’ve discussed are likely to come with hefty fees. Even, if you have a lot of money in your pension pot yielding a decent income, it may still cost you less to pay the tax on your income, rather than the fees associated with the other options.
Another massive benefit with DIY investing is you have total control over your money. That means you can decide what you invest in, and most importantly, you can access your money at anytime. For most investors this beats having to wait until 55 with the above two pension approaches.
Both QROPS and SIPPs are likely to come with associated fees. Though there are likely to be cheaper options available, they aren’t all going to be that cheap. And in truth, they could definitely be overly expensive if you picked the wrong one.
On the other side of the coin, DIY investing doesn’t have to cost much at all. These days you can invest using online brokers that don’t charge any annual fees and offer commission free funds. This means you may only pay the fund’s ongoing costs or expense ratio which can come to as little as 0.04%!
Of course there is another option that we haven’t yet covered and that’s going local.
Foreign Pensions / Foreign Tax Sheltered Savings
A final option would be to invest in some kind of pension or tax wrapped product in your country of residence if available.
The UK isn’t the only place to offer savings with tax benefits. If you live in a country, which offers such products, and the local financial system offers good conduct, why not invest locally.
The Bottom Line
If I already had a SIPP or other UK pension with low fees I would probably just keep hold of it. Only if I were getting close to £1,000,000 would I consider getting some advice about a QROPS. I would do a lot of due diligence and get some good financial advice before I went with it, though.
If the country I lived in had some kind of alternative pension product or tax sheltered account I might be tempted to go with that.
Otherwise, I would just DIY invest.
