For many years, UK pensions held by expatriates had been restrictive in their structure, until the advent of Qualifying Retirement Overseas Pension Scheme (QROPS). The introduction of these new vehicles for the transfer of UK pensions overseas offered significant benefits to expats. Along with being able to take retirement income in a currency of their choice, individuals are no longer under any obligation to purchase an annuity with the proceeds of their pensions.
What is an annuity?
Holders of personal or private pensions in the UK have in the past been required to purchase an annuity upon retirement. An annuity is a contract between a retired individual and an insurance company which provides an income during retirement. This effectively means that your pension savings are converted into a steady stream of income that will last you for the rest of your life.
Annuity rates are calculated on a percentage basis for each £10,000 invested. As such, an annuity rate of 6% in relation to a pension pot of £100,000 would result in an annual income of £6,000 a year.
One key benefit of an annuity is that your income will be guaranteed and therein not subject to stock market fluctuations. It is also possible to choose an annuity that is linked to inflation, to ensure that your money keeps up with the cost of living over time.
For this privilege however you are locked into the current annuity rate at the point of selection and can not ‘switch’ annuity providers for a better deal at a future date.
Another major downside of annuities is that upon death, any residual amount left in the fund, will actually go to the annuity provider. An annuity is set up as a form of ‘cross subsidy’ wherein people who die younger pay for those who live longer.
QROPS and annuities
While some expats who have spent years building up a pension fund have no objection to leaving it in the UK, many others look for an alternative, especially those concerned with wealth preservation. Annuities can serve as excellent financial instruments under the right circumstances; however they are often inflexible and have significant drawbacks relative to other options, such as QROPS transfers.
Individuals lose control of their pension funds on the purchase of an annuity, making it more difficult to adapt retirement strategies to suit their unique needs, and risk tolerance. QROPS on the other hand offer an incredibly wide range of investment choices and allow you the flexibility of managing your own portfolio.
Annuities are tied to interest rates based on gilt or treasury yields. This mean that the purchaser of the annuity is separated from the direction of the fund itself. The situation is compounded by the fact that gilt yields have been very low in recent years. This unfortunately means that distributions from an annuity are unlikely to keep up with inflation.
Assets held in QROPS are also outside of the jurisdiction of UK Inheritance Tax if you die while living in a country such as Spain, Portugal or France. Unfortunately Inheritance Tax rates can be as high as 55%! These schemes will protect your wealth, make it possible to transfer to your beneficiaries, and provide your family with peace of mind.