Are You Resident or Not?
Who stands where in the non-resident stakes
Resident and ordinarily resident People who are resident in Britain and domiciled here pay tax to the British exchequer on their worldwide income and capital gains. People who come to Britain are treated as resident and ordinarily resident from the date they arrive if they intend to live here permanently or for three years or more
Non-resident Non-residents are not generally liable for income or capital gains tax, except on money earned in Britain. They also usually pay national insurance contributions on work in Britain for a British employer. People become non-resident if they leave Britain permanently or live abroad for at least three years, and if their return visits since leaving are less than 183 days in any tax year, and on average less than 91 days per tax year. It is estimated that there are less than 10,000 non-residents
Not ordinarily resident People who are not ordinarily resident are taxed only on the earnings attributable to their British earnings. They are not taxed on the whole of their worldwide income. To qualify, the person must leave Britain after three years
Non-domiciled Non-doms are often people whose families originate from abroad and typically retain affiliations with that country. People born in Britain can claim non-dom status if their fathers were born overseas. Under recent changes to the rules, non-doms can avoid tax on money earned outside Britain and brought back into the country provided they pay the Government £30,000 a year. There are around 65,000 people with non-dom status, around 33,000 of whom are classed as not ordinarily resident
What are the potential benefits of QROPS?
Tax efficiency. Subject to the laws of the overseas country in which you become resident, it may be possible to receive income from your retirement fund at lower tax rates than would apply in the UK.
Investment choice. There is no need to buy an annuity, so you can retain control of your pension savings capital, and you can hold assets such as residential property, which are not usually allowed in UK pension funds.
Passing wealth between generations. QROPS enable you to pass the portion of your pension savings that you do not spend to your heirs and, depending on the tax laws of the country where you choose to become resident, there may be a lower rate of Inheritance Tax to pay or – as is the case in Cyprus – be no local equivalent of this tax.
Avoid or diminish exchange rate risks and costs. You can take income and capital from your QROPS in the currency of your choice.
What are the potential disadvantages of QROPS?
Costs. Legal and administrative fees involved in setting up and maintaining QROPS vary widely and need to be considered carefully in advance. Take account of initial and annual fees when assessing whether their impact on your retirement fund can be justified by increased choice and tax-efficiency.
Investment risk. If you decide not to buy an annuity and to keep your QROPS invested in stock market-based assets, or any other assets whose value is not guaranteed, there is a risk that your income and capital could fall and you may not get back as much as you invested.
Regulation gap. Some countries with lower tax rates than the UK also offer less investor protection in terms of regulation of financial services and they may not offer any statutory compensation scheme. That is why it is vital to seek pension advice only from professionals who are fully authorised in the UK as well as the overseas jurisdiction to which you are considering retirement.
Fiscal change. Some experts reckon the opportunities offered by QROPS are simply too good to last. Critics claim QROPS enable British savers to obtain generous tax relief while accumulating pension funds and then to avoid British taxes when it comes to enjoying the benefits. If too many people take up these opportunities HM Revenue and Customs may act, subject to European Union rules.
Consider your options carefully but without unnecessary delay
No decision affecting your retirement capital and income should ever be taken in a rush. Remember the old maxim: ‘Act in haste – repent at leisure.’ If any adviser seeks to put pressure on you for an immediate decision, then your answer should be ‘No, thank you.’
However, as mentioned earlier, the sooner you start to plan for retirement, the easier it will be to ensure that this really is the holiday of a lifetime. The earliest pounds you invest in a pension will have the longest to accumulate for your benefit. The sooner you begin to consider how – and where – you enjoy the fruits of your prudence, the more likely you are to reach the right decision for you and, where relevant, your family.
Quicker, cheaper and more comfortable international travel has widened everyone’s choice about where to live. People who retire overseas need no longer wave goodbye to friends and family forever.
QROPS extend that choice into one of the most important financial choices many people ever make: how to fund and enjoy retirement. Make sure you consider your options carefully and in a timely manner with a specialist pensions professional who is fully authorised to advise on all the options you enjoy today.
ADVICE FOR EXPATS
British expats abroad can now get more control over their pensions plans, thanks to new rules that remove many restrictions for people who retire overseas.
They can pay lower tax on income drawn from a relatively new form of pension, avoid being forced to invest capital in an annuity which dies with the purchaser and pass their wealth to friends and family free of tax on death.
Needless to say, these important new opportunities are subject to extensive legislation, which will be discussed in detail later. However, the important point for now is that a Qualifying Recognised Overseas Pension Scheme (QROPS) can enable savers to enjoy the best of both worlds.
Portugal You can receive valuable tax reliefs while working and saving toward retirement in the United Kingdom, without needing to pay higher taxes when you draw benefits or submit to UK restrictions on how you invest and spend the fund.
What is a Qualifying Recognised Overseas Pension Scheme (QROPS)?
As its name suggests, this is a form of pension based outside the UK which is recognised by the British authorities as being eligible to receive transfers from registered UK pension funds. Reputable advisers will only recommend transfers to countries which provide consumer protection equivalent or greater than the safeguards in the UK.
People who are living inside or outside the UK can transfer their deferred company and personal pensions to a QROPS. Any pension can be transferred as long as an annuity has not been purchased or, if it’s a final salary scheme, that the pension has not commenced.
Better still, where the pensioner has not been resident in the UK for five complete and consecutive fiscal years – and the tax rules determining residence will be examined in detail later in this guide – HMRC restrictions on how income and capital are spent no longer apply.
For example, as set out in Clause 2 Schedule 34 of the Finance Act 2004, there is no need to report what HMRC would regard as “unauthorised payments” and tax of up to 82 per cent that might be levied on such payments in the UK can be avoided. However, it is important to understand this does not mean trust busting is acceptable.
Who might benefit from considering a QROPS?
Anyone considering retiring overseas and becoming resident in a foreign jurisdiction or country for five years or more. The amount of tax you pay on income and capital received from your QROPS will be determined by the taxation of the country in which it is based and you are resident.
These laws or fiscal statutes vary from country to country but many are more favourable to pensioners than those in the UK.
For example, pensioners resident in Cyprus can opt to pay a fixed flat rate of five per cent tax on all income above a small tax-free band or personal allowance; alternatively, they can choose to receive a higher personal allowance and pay higher rates of income tax on any income in excess of the allowance.
The best option for you will depend on your personal circumstances and it makes sense to take professional advice which can take account of your individual needs and objectives.
British pensions that can be transferred to a QROPS include former employers’ occupational schemes (but not final salary or defined benefit schemes already in payment); Superannuation Schemes; Executive Pension Schemes; Self Invested Personal Pension Schemes (SIPPSs); Small Self Administered Schemes (SSASs); Section 226 Personal Pension Schemes; Section 32 Pension Transfers and Personal Pensions.
You cannot transfer British Government or State pensions to a QROPS.
Do I need to leave the UK forever to benefit from QROPS?
No. Rising numbers of people who decide to retire overseas – perhaps to enjoy better weather and a lower cost of living – can take advantage of a QROPS. You can continue to visit friends and family or return to Britain for any reason, provided you remain a non tax resident of the UK. So, you could return to the UK whenever you wish but the maximum length of time you can spend in Britain will be limited before UK taxes apply.
For example, you must beware of the six-month rule and the three-month average rule to avoid becoming resident in the UK again for tax purposes and losing the advantages of QROPS.
If you are present in the UK for 183 days or more in any tax year – which starts on April 6 and ends on April 5 – or you are present in the UK for an average of 91 days or more per annum, measured over up to four years, then you may become resident in the UK for tax purposes.
But be careful because, these days, rules are not the law. It is possible to remain a UK tax resident even if you spend less than 90 days in the UK, so it makes sense to take advice that is specific to your individual circumstances in this very tricky area.
Since April 6 2008, if an individual is present in the UK at midnight, that counts as one day’s residence. In practice, days of arrival in the UK are counted but days of departure are discounted. Where an individual arrives and departs on the same day, this will not count as a day’s residence for tax purposes.
Are QROPS suitable for everyone?
No. Most British pensioners retire as UK residents and so must pay UK tax. There is no statutory limit on the minimum value of pensions that can be transferred to a QROPS but only funds worth more than £100,000 are likely to generate sufficient tax savings to justify set-up costs, which vary between one per cent and five per cent of the fund transferred.
Pensioners who have plans or policies with Guaranteed Annuity Rates (GARs) higher than returns available today, may also find QROPS do not justify giving up their GARs. As mentioned earlier, Government pensions – excluding the National Health Service scheme - British State pensions and final salary or defined benefit pensions already in payment cannot be transferred to QROPS.
Why it makes sense to take specialist advice
Given the complexity and variety of different countries’ tax laws, this guide can only serve as a general introduction to the new opportunities created by QROPS. Specialist financial advisers, who are authorised in the UK and the country to which you intend to retire, can answer questions specific to your individual circumstances.
Remember that the fundamental purpose of a pension is to provide retirement income. So, it is vital to ensure that your money does not run out before you do – and to avoid taking unnecessary risks with your income or capital. For these reasons, it makes sense to consult fully-authorised, specialist advisers before making any decisions about QROPS.
But the first step for most people will be to build up the maximum pension they can within the UK’s tax rules, and this is the subject of the next chapter.
Remember that the fundamental purpose of a pension is to provide retirement income. So it is vital to ensure that your money does not run out before you do – and to avoid taking unnecessary risks with your income or capital.
Proving Residency is Sipmply too Taxing
How do you escape the taxman by proving you are not a UK resident? It is becoming increasingly hard to know, as Seychelles-based millionaire businessman, Robert Gaines-Cooper, has just discovered.
This week the Court of Appeal ruled that ensuring that you are in Britain for only 91days in any year is no longer enough. It seems that having property here, or children in a British school, or horses in a British stable or even regular attendance at Ascot, may be enough to bring you within the UK tax net.
There will be many who applaud the Revenue’s crackdown on the thousands of super rich who are the leaving the rest of us to fill the gaping hole in the public finances. But a system that encourages bizarre arguments about the “centre of gravity” of a person’s life is damaging.
As Barclays’ John Varley said this week Britain’s increasingly uncertain tax regime makes it a less attractive place in which to live and do business.
A vague definition of UK tax residency may have suited the Government in the past, as it has been able to take either a lax or strict approach, depending on which way the wind was blowing.
The Revenue has also favoured this approach because it has made it impossible for clever lawyers and accountants to come up with fool-proof schemes to keep clients outside the taxman’s grasp.
But it is surely time to set out in law what is meant by UK residency. Having a horse should not be one of the tests.
By David Wighton
Where should I retire to?
Tax regimes around the world vary enormously. The majority of countries levy tax on pension income at your highest marginal income tax rate.
While some countries have a top rate the same or higher than Britain’s forthcoming 50% — Belgium’s is 50% and Sweden’s is 55% — others are far kinder on your pocket, figures from Gary Heynes at Baker Tilly, the accountant, show.
Hong Kong has a top rate of only 16% and Singapore has 20%. In America, the top rate of income tax is 35%, and in Cyprus it is 30%.
Pensioners living in Cyprus and drawing an overseas pension can opt to pay a fixed rate of 5% on income above a small tax-free personal allowance of €3,420 (£3,136). Alternatively, they can pay the normal rate of up to 30%, in which case the first €19,500 is tax free — so the smaller your income, the better off you are under the normal system.
France and Spain can be less attractive than the UK — unless you expect retirement income of £150,000 or more, which would mean you would be hit with Britain’s 50% tax. France levies a top rate of income tax of up to 40% and Spain 43%.
In New Zealand and Australia income tax is charged at up to 39% and 45%. However, Australia does not charge tax on pension income, provided you are over 60.
Heynes said: “Recent changes to pension rules in Australia allow you to contribute more to your pension if you move there before you retire, and since July 2007, income drawn from retirement savings has been tax free if you’re over 60.”
Consider other aspects of tax regimes around the world, too. Capital gains tax (CGT) is levied at a flat rate of 18% in Britain. However, in places such as New Zealand and Hong Kong there is no charge. In America, CGT is 15%.
In Australia it is a hefty 45% — although residents are eligible for relief on their main home as in the UK.
Expats receive a tax uplift on their worldwide assets based on their date of arrival, so if you bought a painting, for example, for £5,000 and it had appreciated in value to £20,000 by the time you moved to Australia, you would be liable for CGT on growth only from that point.
Pensions & QROPS: Retiring Abroad
Deposits, bonds, shares and investment returns - all these will boost your pension plan during your retirement as a British expat.
Rising numbers of people now spend a quarter or even more than a third of their lives in retirement, enjoying what is – quite literally – the holiday of a lifetime.
However, just like any other holiday, you need adequate funds to make the most of it. As the novelist Somerset Maugham observed: “Money is like a sixth sense; without it, you cannot make full use of the other five.”
Planning ahead and seeking specialist advice sooner rather than later will make it much easier for you to achieve your retirement objectives.
For example, the sooner you start to save and invest for retirement, the better the chances are that you will accumulate the large sums of capital needed to provide an adequate income in today’s economic environment of low interest rates.
What’s inside the wrapper?
There is no particular magic to the word pensions - whether they are QROPS, SIPPs or any other sort of retirement savings – they are only a tax-efficient wrapper to hold assets which can deliver income, capital growth or a mixture of both. So, it is vital to consider carefully, in conjunction with your financial adviser, the different risk and reward characteristics of various assets or means of storing wealth.
No single answer will be right for everybody because individual and family circumstances vary so widely, but it is worth considering investment returns from the main asset classes in the past when deciding which components should play some part in your pension portfolio.
For most people, the appropriate advice will be to hold a mixture of different assets, with the proportions varying on the individual or family requirement for security, income or growth and how long they can afford to remain invested.
Deposits: low-risk, low-income
There is no need to take any short-term risk to enjoy the tax advantages of pensions; you can hold all of your contributions in cash deposits. However, while that might be a reasonable, cautious strategy in the final year or two before you intend to retire and draw benefits – because it will protect you from stock market setbacks - it would be wrong to imagine that this option is risk-free.
The explanation is that inflation tends to erode the real value or purchasing power of money over time. Even with today’s low levels of inflation, this is worth considering because, when planning retirement, you may want to protect the purchasing power of your pension decades into the future.
Banks and building societies promise to return your capital in nominal or face value terms; they do not promise to preserve its real value or purchasing power.
Perhaps unsurprisingly, low-risk deposits have tended to provide lower returns than the other two main types of asset which can be held in British pensions.
Bonds: higher-risk, higher income
Large companies issue IOUs to investors called corporate bonds, which usually promise to pay a fixed rate of interest for a fixed period of time before repaying the original sum invested. Countries also issue bonds and those issued by the British Government are called gilt-edged stock or gilts.
Both types of bond usually pay higher interest than deposits but entail a higher degree of risk; for example, bonds are not covered by the £50,000 per person statutory safety net that protects deposits with banks and building societies registered with the Financial Services Compensation Scheme.
By contrast, no bond is any better than its guarantor or the company that issued the bond. As a general rule, the higher the yield – that is, the income paid by a bond expressed as a percentage of the price for which it can be bought – the higher the risk of the bond.
This could be a specific risk – for example, the risk that the bond issuer might default or fail to pay income and/or capital; or it could be market risk – for example, that inflation is expected to rise and erode the real returns from all fixed interest bonds.
Quantitative easing - an economic policy intended to prevent the recession turning into a slump in Britain and elsewhere - increases the risk of inflation, as that is what has happened on previous occasions when governments printed more money to solve current problems.
Shares: high risk in pursuit of high returns
Shares – also known as equities – are higher risk than deposits or bonds, because they make no promises about repaying investors’ capital or income and enjoy no statutory safety net. However, despite recent setbacks, shares have tended to provide higher returns than other asset classes over most periods of five years or more in the past.
That historical fact is set out in the table, Shares versus Bonds and Deposits. Barclays Capital – a subsidiary of the high street bank – measures returns from these different stores of wealth going back to 1899 and updates its analysis annually. Before going on to consider those statistics in detail, it is important to understand that the past is not a guide to the future. Share prices can go down and you may get back less than you invest.
Investment returns: how long have you got?
According to the Barclays Capital Equity Gilt Study 2009, shares broadly reflecting the composition of the London stock market delivered greater returns than bonds or deposits in about three quarters of all the periods of five consecutive years in that sample of more than a century. To be precise, shares beat deposits on 74 per cent of those five-year periods and beat bonds 75 per cent of the time.
However, it can be seen that if the period of investment was shortened to just two consecutive years, the probability of shares doing best fell to nearer two thirds. In other words, there was a one-in-three chance that bonds or deposits would do better. This demonstrates the risk that short-term setbacks can hit share prices and explains why many advisers say shares are only suitable for money you can afford to remain invested for at least five years.
Over longer periods of time, such as 10 consecutive years, the historical probability of shares doing best increased to 92 per cent relative to deposits and 81 per cent compared to bonds.
Diminishing risk by diversification
Many pension savers remain understandably wary of the risks entailed in bonds and shares, despite the fact that bonds generally pay higher interest than deposits today and that shares have tended to deliver higher total returns than either bonds or deposits over the medium to long term in the past.
One way to square that circle is to consider pooled funds which seek to diminish risk by diversification.
These include unit and investment trusts, open-ended investment companies (OEICs) and other managed funds which bring together individual investors’ money to spread these funds over large numbers of underlying shares, bonds and other assets. This should give investors exposure to income and growth from the underlying assets while setting out to reduce their exposure to setbacks or failure at any one company, country or sector of the stock market.
The value of expert advice
In addition to diminishing risk by diversification, pooled funds also enable individual investors to share the cost of professional fund management. In other words, dedicated staff spend their days trying to keep abreast of today’s fast-moving money markets to make the most of your investments while you get on with making a living or enjoying retirement.
However, with more than 2,000 pooled funds authorised to be marketed in the United Kingdom and many more overseas, it is difficult to know which ones to choose. Just as do-it-yourself investment will not suit everybody, with many people preferring to pay professional fund managers, it may make sense to pay a professional financial adviser to recommend appropriate funds – and to make sure your portfolio of pension investments remains appropriate to your changing needs in the years ahead.
Flexible strategies for the future
For the reasons set out earlier, there is no single portfolio that will suit everybody and no substitute for seeking fully authorised financial advice which will be tailored to your individual – and, if relevant, family – circumstances.
This will entail a fact find procedure, where the adviser will seek information about your attitudes to risk and reward as well as other factors such as your requirements for income, growth or a mixture of both.
This may seem a bit of a chore but should enable the adviser to recommend an appropriate asset allocation or financial strategy to suit you. You should not regard this as a decision to file and forget but as a strategy that should be reviewed regularly.
For the reasons set out in the final chapter, it makes sense to choose your financial adviser carefully and to keep in touch with him or her during your retirement.
There is no single portfolio that will suit everybody and no substitute for seeking fully-authorised financial advice which will be tailored to your individual – and, if relevant, family – circumstances.
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