Many expatriates hold their UK pension benefits in a Self Invested Personal Pension (SIPP). This is because, generically speaking, the average expatriate tends to be higher earning and has a good understanding of investments. Such individuals normally wish to select their own individual investments and have the freedom to pursue a personal investment strategy.
  
In 2006, the UK Government introduced Qualifying Recognised Overseas Pension Schemes (QROPS) for those who are intending to retire outside the UK. So, as a UK expatriate who intends to remain offshore or a foreign national who accumulated some pension benefits whilst living and working in the UK, is it best to leave their SIPP behind or transfer their pension benefits into a QROPS?
 
QROPS & SIPPS
Firstly, let's address the most fundamental issue. What is a SIPP and what is a QROPS?
  
Basically, a SIPP is a type of personal pension which gives the member greater control over the investment of their pension money. It is possible to invest in a broader range of investment funds such as stocks and shares, unit trusts, investment trusts, managed funds and property.
 
A QROPS is a pension scheme which is set up outside of the UK and which is recognised by Her Majesty's Revenue and Customs (HMRC) as meeting certain standards and conditions equivalent to a UK pension. This approval allows anyone with a UK registered pension who is living outside the UK, or is intending to leave the UK, to transfer their pension offshore.
 
Both UK and non UK residents can have a SIPP. An individual must be non-UK resident or have the intention of becoming non-UK resident in order to transfer their money to a QROPS. When deciding whether it is worth transferring a pension to a QROPS, it is important that the individual considers their long term intentions. A SIPP can sometimes be cheaper than a QROPS so if an individual transfers to a QROPS and then returns to the UK, the UK pension legislation will once again apply to the scheme meaning that the member will have incurred the possible higher costs of the QROPS with no associated benefits.
  
Jurisdiction & Pension Legislation
One of the main differences between a SIPP and a QROPS is that a SIPP is regulated by UK legislation whereas a QROPS is predominantly subject to legislation in the jurisdiction where it is based. It is important to note however, that the QROPS administrators have to adhere to HMRC regulations in respect of any member who has been non-UK resident for less than five tax years. After a member of a QROPS has been non-UK resident for over five tax years, this is where the beauty of a QROPS really comes to fruition.
 
A member of a QROPS does not have to live in the same jurisdiction as where the QROPS is based. This means that an individual not only has the freedom to choose a particular QROPS provider but also the jurisdiction under which the QROPS is regulated. For example, an expatriate who is intending to retire in South Africa may place his money in a Guernsey based QROPS as Guernsey does not tax retirement income at source and overseas retirement income is not subject to income tax in South Africa.
 
It is important to consider jurisdictional issues for a number of reasons. Let's take tax free cash for example. If an individual is a member of a UK SIPP, they will generally be entitled to take 25% of the pension fund tax free. If they had their pension invested in a QROPS based in the Isle of Man, then Isle of Man legislation potentially allows up to 30% of your pension fund to be taken as a lump sum. A QROPS based in Hong Kong only allows lump sum payments to be made at the discretion of the trustees and therefore such payments cannot be guaranteed.
  
A SIPP is subject to strict UK legislation with regards to permissible assets. QROPS schemes can be more flexible although once again, it is important to check not only jurisdictional legislation but also the rules of the intended QROPS provider.
  
Inheritance Tax Planning
If an individual is invested in a SIPP, then like a QROPS, it is not necessary to have to buy an annuity at the age of 75. After retirement however, and leading up to age 75, a client can go into unsecured pension whereby they can draw an income from the pension fund. However if the member dies during this time and leaves their pension to a chosen beneficiary, then that person can inherit the pension fund as a lump sum but the fund will suffer a 35% income tax charge for the privilege! This compares very unfavourably to a QROPS where a member in the same situation who has been non-UK resident for over 5 years, could leave money free of tax to his or her chosen beneficiaries where, for example, the QROPS is based in Guernsey. If the QROPS was based in the Isle of Man, there would be a 7.5% tax charge on a lump sum payment or a spouse's/dependant's pension could be paid. Still preferable to a 35% income tax charge!
 
The situation is even more favourable for a member of a QROPS who dies after the age of 75 whilst taking an income and they have been non UK resident for over 5 years. In this situation there would be no tax charge if the QROPS was based Guernsey. If the QROPS was based in the Isle of Man, then the fund could be returned less a 7.5% tax charge or a spouse's/dependant's pension could be paid. If the client’s money was in a UK SIPP and the member had opted to take Alternatively Secured Pension (ASP) after the age of 75, then any ASP funds remaining on death can be passed to charities or dependants tax-free. However, transfers to non-dependants will be hit by a 70% tax charge plus Inheritance Tax at 40% on sums over the nil rate band (£325,000 from 6 April 2009).
 
Property Investment
A SIPP does not allow investment in residential property. The nearest an individual can get to residential property in a SIPP is a Hotel Serviced Apartment provided that there are no personal usage rights. However, a QROPS may allow investment in residential property once you have been non-UK resident for over five tax years. Once again, it is always recommended that any potential investments an individual wishes to make are confirmed before that individual becomes a member of his or her chosen QROPS scheme.
 
Whilst a QROPS can technically hold property, many QROPS providers will not accept property as an asset. Those that do insist that the QROPS actually purchases an offshore company and the offshore company purchases the property. This is insisted upon to protect the trust (and other QROPS policies within it) should a large debt amount against the property as this debt will not pass further than the company.  
 
Summary
It is therefore clear that a QROPS can offer many additional benefits over a SIPP. However, no matter how appealing a QROPS may sound, anyone considering transferring their pension abroad should always take advice from a suitably qualified person. It is important that an individual is realistic regarding where he or she intends to spend their old age. Although the appeal of avoiding a potential 82% tax charge is enticing, if you intend to return to the UK, then unfortunately once you become UK resident, you are well and truly back in the clutches of HMRC, even if your pension is still elsewhere!
 
Candour Consultancy are authorised representatives of all the major SIPP and QROPS providers and can advise on the most suitable product for your personal circumstances.
   
To speak to one of our fully qualified consultants, simply click here or call us on +971 4 312 4410.