Many expats have already seen their standard of living drop quite dramatically over the last couple of years, as their £ investments have depreciated in real terms against the Thai Baht.  In addition, the recently proposed HMRC tax changes for expats, could severely question their ‘non resident’ status, in an attempt to tax them on their worldwide income.  For those expats who are totally dependent on the income they receive from their £ investments and in particular from their former UK pension arrangements, they must act now to avoid the extended clutches of HMRC.

For almost 4 years now, UK expats have had the ability to transfer their UK pension schemes offshore into what are referred to as QROPS (Qualifying Recognised Overseas Pension Schemes).  These schemes remove the whole pension arrangement away from the UK tax authorities, provided that it is your intention to live abroad for a full 5 years before taking the benefits.  Even though over £500 million has been moved into QROPS during the last 3 years or so, many expats still seem unaware of their existence and ultimate benefits.

People still seem to fear the word ‘offshore’ and still feel a high degree of comfort with a pension arrangement provided by a previous employer in the UK, often referred to as a final salary / defined benefit scheme.  In particular, when some of these employer schemes include a degree of ‘guarantee’ on the eventual benefits payable.  However, declining investment returns and very low interest rates, have resulted in over 90% of such schemes currently being in deficit.  What does this mean? Well basically that the company do not currently have sufficient assets to meet their ‘guaranteed’ obligations to their retirees.  Not good!

So I would suggest that the so called ‘guaranteed’ benefits are only valid if the company is capable of maintaining sufficient funding and of making good any existing losses.  The recent decision taken by Readers Digest – for many years a household name in the UK – to cease trading, was to a large degree down to their inability to make good an estimated £125 million pension scheme shortfall.  So where does that leave the 1,000 or so Readers Digest pensioners I wonder?  Yes of course the UK government have in place their own guarantee for certain instances such as this, but these are strictly limited and there is certainly no bottomless pit of funds to cushion such a blow.

So what can you do about all of this bad news?  Well firstly, you can look at any UK pensions that you have and look at the possibility of transferring them offshore now.  All UK pensions in payment are taxed at source.  For those with larger pension benefits, this could mean up to 50% of your income disappearing before it even reaches you.  Then of course, there are the taxes applicable upon death after retirement, which range between 35% at best and 82% at worse.  So your dependents would receive whatever is left after the HMRC has taken their very sizeable slice of tax.  Not good!

Furthermore, HMRC have very recently indicated that retaining a UK pension, may well be sufficient to deem you as ‘resident’ for UK taxes under their new, proposed regime.  So I would suggest you leave it there at your peril.  Quite simply, with an offshore pension (QROPS) you pay ZERO tax on any income you withdraw and ZERO taxation upon your eventual demise.  In a nutshell, your funds are completely outside of the UK – HMRC tax net.

So what is the process for transferring benefits from the UK?

1.  You provide a letter of authority, so that information can be obtained

2.  Once all the current information is to hand, a detailed report is produced analysing all the pros and cons of both arrangements

3.  If you decide to transfer, we complete all the necessary paperwork on your behalf and forward this to the trustees of the UK scheme

4.  Once your transfer money has been received, we invest it on your behalf and in accordance with your specific wishes.

The most favoured jurisdictions for QROPS are Guernsey or the Isle of Man, which are both highly regulated and extremely well established offshore centres.  The whole process can take 3/6 months to conclude, but you are kept fully informed of the progress at all stages of the transfer.  We offer a highly personalised fund management service from our dedicated portfolio team based in Bangkok, providing you with 24 hour on-line access to your invested assets.

In summary, with interest rates at their lowest for many years and corresponding transfer values at their highest, there has probably never been a better time for expats to transfer their UK pensions into an offshore arrangement.  The sooner you act, the sooner you can start to ‘re-establish’ your expat status under the proposed new HMRC regime.

The above article is produced by Montpelier (Thailand) Ltd. To speak with a representative of Montpelier, please email thailand@montpeliergroup.com or  call them on either 038 074730, or 0800 178 269.