Want A £1m Plus Pension Without Any Tax Penalties?

Expats can beat the lifetime allowance rules by switching from a UK pension to a Qualifying Recognised Overseas Pension Scheme (QROPS) – but the window of opportunity may soon close.

The government has recently opened a consultation aimed at aligning the tax treatment of QROPS with onshore pensions for expats who move back to Britain.

But the legislation seems to leave a loophole.

Neither current or proposed legislation that should take effect from April 2017 seems to mention the lifetime allowance.

This is a major advantage for anyone with a QROPS.

Switching to a QROPS

Any retirement saver can switch their UK pension to a QROPS providing they intend to shortly become an expat or can show they live permanently abroad.

Going in, any transferred fund from the UK should be less than £1 million or HMRC applies a tax charge for a breach of the lifetime allowance. This allowance is the total amount a retirement saver can hold across one or more pension schemes.

Once in the QROPS, the lifetime allowance rule does not count, so the fund can grow larger than £1 million without any penalty.

Current rules for expats moving back to the UK tax 90% of the benefits paid from a QROPS after any tax-free amount is withdrawn.

This tax-free amount can be up to 30% of fund value rather than the standard 25% paid in the UK.

Lifetime allowance loophole

The new rules under consultation do not appear to alter the lifetime allowance benefit of a QROPS but do tax all the benefits paid to a returning expat.

The reality is that allows a QROPS holder to bust the lifetime allowance without a tax penalty while paying the same tax on any benefits at the same rate as they would have paid if they had left the fund in the UK.

The focus of the consultation is not on how much a retirement saver has in their overseas pension but how much tax is paid on the benefits paid from the scheme.

The opportunity allows expats with a QROPS to build £1 million plus funds and then take 30% of the fund tax-free – then to pay income tax on the pension benefits as if the fund was in the UK once they have returned home.