Offshore pensions; no need to buy that pension annuity

There are millions of people planning to retire abroad, and they can avoid having to buy a pension annuity, and see other valuable tax advantages.

Offshore pensions are a relatively new concept, which have developed from rule changes introduced in April 2006. The introduction of the Qualified Registered Overseas Pensions Scheme (QROPS) rules has offered emigrating investors an attractive list of benefits when they move their plans offshore. Useful for avoiding the UK rules and having to purchase an annuity. These benefits include more tax-free cash, improved death benefits, no requirement to buy an annuity and freedom to invest in residential property. These advantages are only available to those retiring abroad or who are already expats.

As an example, the Isle of Man recently  introduced new pension rules that allow pension investors access to 30% tax-free cash, rather than the 25% allowed in UK. The Isle of Man schemes also allow investment in residential property, and do not require the purchase of an annuity at the age of 75….unlike the UK where you can’t invest in residential property and you do have to buy an annuity. 

If you die before you are 75 while in an income-drawdown scheme, then inheritance tax on the fund in the Isle of Man is just 7.5%, compared with 35% in Britain.

Whichever jurisdiction you are in offering these liberal tax structures, QROPS schemes only require the provider to report dealings within your fund to the Revenue for five years. After this there are no reporting requirements at all.

QROPS plans can work well for people moving to certain retirement destinations, but yo do have to take into account local taxes. Cash in your pension in France, for example, and you won’t be allowed any tax-free cash at all, while local income taxes in Spain and Italy can leave pensioners worse off than at home.

If you can get the planning right you could be laughing all the way to a foreign bank.

How the pension rules work:

— Any UK resident can take out a QROPS, but they are designed primarily for people who expect to move or retire abroad.

— You can transfer funds accumulated here to an offshore pension.

— New contributions to an offshore pension will get tax relief only if they are based within the EU. With offshore pensions based in havens such as the Isle of Man, you may get no tax relief.

— To take out an offshore pension, you need to speak to an adviser specialising in offshore pensions. Charges are generally higher, too. But it could be worth it.