Overseas pensions may look good, but beware the sting

Tax authorities won't say if you are opening yourself up to an investigation.

(GREG WOOD / AFP)

For many Britons, retiring abroad is becoming a reality rather than just a dream. Figures from the Institute of Public Policy Research reveal that the proportion of British pensioners emigrating has increased by more than a quarter since 2000. But, once settled abroad, British retirees have an important question to answer: should they move their pension funds overseas or leave them in the UK?

Under HM Revenue & Customs rules introduced in 2006, it is possible for Britons who have lived for five consecutive tax years in another country to move their pensions offshore. There is a proviso, though. The money has to be moved into what's called Qualifying Recognised Overseas Pensions Schemes (QROPS). The schemes allow British expatriates to transfer their pension pots overseas and thereby stop paying UK income tax. Since the introduction of the QROPS, an estimated £400m has been moved abroad by expatriate Brits.

However, pensions professionals warn that a growing number of phony financial advisers, often based offshore and unregulated by the Financial Services Authority (FSA), are targeting British expats to try to flog "get rich quick" pension solutions. These promise the earth but in reality siphon off huge chunks of a member's pension and can even trigger an investigation by HMRC.

Martin Cadman, the managing director of pension provider MC Trustees, says that he recently came across a case where an adviser based overseas had tried to charge a client a £160,000 commission to transfer a £2m pension fund. The the case isn't isolated, he adds. Similarly "outrageous" commission charges are not uncommon.

Geraint Davies, the managing director of Montfort International, a UK-regulated firm specialising in overseas pension transfers, says some overseas advisers are exploiting expats' lack of understanding of tax rules. "We are hearing of instances of so-called advisers coming into the country, meeting people in the UK [although] they haven't got a UK base, and then leaving again. They are like 'hit and run' merchants."

Some of these overseas advisers display UK telephone numbers on websites that actually rang through to other countries, Mr Davies says.

Avoiding UK income tax may not be all it's cracked up to be. "You have got to be careful that you don't end up in a tax jurisdiction which has a higher rate of income tax than the UK. You need to assess the tax system because it won't necessarily be better," says Bethell Codrington, the managing director of Panthera International Pension Solutions.

Moving a pension overseas can have a substantial tax benefit, however. Under UK pension law, pensioners are allowed to withdraw a tax-free lump sum worth 25 per cent upon retirement but in other jurisdictions the percentage of the total pension that can be taken as a cash lump sum can be higher, which has allowed some advisers to promise attractive cash withdrawal options.

But in the past, HMRC has cracked down on many pension schemes based in Singapore, stripping them of QROPS status amid rumours of some allowing clients to take out up to 100 per cent as cash. What's more, an HMRC spokesman admitted under pressure that the Exchequer could not say whether or not it would in the future investigate Britons who put their money in QROPS, which pay large lump sums.

Expats do have ways to protect themselves, though. Firstly, it is essential to seek expert tax advice from an adviser who is regulated by the FSA. "If you are going to [transfer your pension fund to] a QROPS, you really should only get advice from a registered individual." says Mr Codrington. "That doesn't just mean regulated here in the UK, but in Spain or Australia or wherever you are. At least you are talking to someone who knows what they are doing, and if they get it wrong you are going to have some sort of comeback."

British nationals can also check on the HMRC's website's twice-monthly updated list of QROPS to see whether a particular overseas pension scheme is listed. The can also use the FSA's website, which lists every regulated independent financial adviser in the UK.

It is important for expats to factor in the size of their pension pots. Mr Cadman says QROPS transfers are certainly not for all expat pensions. "If the pension pot is less than £100,000, it is unlikely to be viable because the charges of QROPS are quite high compared with a UK pension," he says. "Below that level, you might be struggling to cover the fees and also still get a real return on your money."