Qualifying Recognised Overseas Pension Schemes (QROPS) are seen by many as the best route to tax effective retirement savings for expats.
However, with so many countries offering QROPS there is another issue for those thinking of transferring their pension to consider.
That is whether the country where the QROPS is based has a double tax agreement (DTA) with the UK.
This is a quick guide to understanding the issue
What is QROPS?
QROPS allows for anyone with a UK pension pot planning to leave the country to retire, or has already done so, to transfer their pension offshore.
With planning, this can be a hugely rewarding but the QROPS must be recognised by HM Revenue and Customs.
However, financial advisers should take careful note of the DTA in place before recommending a QROPS jurisdiction.
What is a DTA?
This is an agreement between the UK and other countries to avoid earners and investors paying tax twice on the same money.
What do I need to do?
You need to ensure that your financial advisor is aware of a few issues – most importantly where does the DTA in place put the primary taxing rights – in the QROPS jurisdiction or the UK? This could be a very simple and expensive mistake to make.
Will the DTA cover my scheme?
You will need to check this, but the scheme may only cover occupational pensions rather than private pensions, for instance.
How much tax will I pay?
A financial advisor will advise on tax bands under a DTA and whether it will be a nil rate when you retire. Essentially tax will have to be paid on your pension and the DTA will define in which of the two countries you will pay it – either in the UK or where you are planning to live. You will only be taxed once.
If your QROPS is in a third country, the benefit will be paid gross of tax.
What is Unilateral Tax Credit Relief (UTCR)?
This is similar to a DTA and is the relief given when a source of income has already been taxed in another country. Most countries have these in place rather than a DTA as they are easier to implement and are, generally, fairer to those being taxed.
For more information about the double taxation treaties for 185 countries and territories, click this link http://unctad.org/en/Pages/DIAE/International%20Investment%20Agreements%20(IIA)/Country-specific-Lists-of-DTTs.aspx