The question is uncomfortable for many expats, but prudent financial planning means looking after your family and loved ones when you die.
Qualifying Recognised Overseas Pension Schemes (QROPS) fall under the same inheritance rules as UK pensions – plus an extra tax-free boost for expats who are left a share of any unspent pension money.
The rules about who pays tax on what when inheriting a pension changed in April 2015 and April 2016, so if you are making a will or thinking about estate planning, you need to mug up on the latest regulations.
The rules rely on some jargon –
- Crystallised or uncrystallised pension – this is pension speak for has the retirement saver taken any cash from their pension. If no, the pension is uncrystallised and if yes, crystallised
- Marginal rate – The highest rate a UK taxpayer pays income tax
Working out if any tax is due on the QROPS payment depends on If the payment is a lump sum or income and if the retirement saver who has passed on was under or over 75 years old. This applies to UK residents, not expats, who have special tax rules.
Unlike a UK pension fund, if the amount remaining in a QROPS exceeds the lifetime allowance, no tax penalties are due.
Inherited QROPS tax matrix
Tax boost for expats inheriting a QROPS
These tax rules apply to most onshore pensions as well as QROPS, but expat beneficiaries can boost the amount they take from an offshore pension under a special rule that does not apply to anyone living in the UK.
If the beneficiary is an expat aged over 55 who has lived outside the UK for at least five complete tax years, cash in the QROPS may escape UK income tax on a lump sum payment. This is regardless of whether the scheme is crystallised or not.
Another rule to watch is if the pension saver was under 75 years old and the money is taken from the fund two years after the pension provider knew of the death, income tax may fall due.
Different rules apply to inheriting the state pension if an expat becomes a widow under certain circumstances.