One of the attractions of a Qualifying Recognised Overseas Pension Scheme (QROPS) is most providers offer a 30% tax free cash lump sum.
That’s a generous fifth more than a pension fund of the same amount will pay in the UK.
But taking that lump sum can impact on an expat’s retirement finances in later life.
Taking the cash is all well and good if the money is needed.
First, for most QROPS savers, the pension is just part of an investment strategy of cash, property, stocks and shares, bonds making up a pension portfolio.
Spending savings in the right order
For example, while that tax-free cash is sitting in a pension the money is generally out of the reach of UK inheritance tax – and if the markets are on the up, the investment is still growing as well.
Instead of diminishing the QROPS, spend other savings that are subject of inheritance tax first.
Inheriting tax-free pension cash is a big incentive for expats moving their UK pensions into a QROPS and then adding to the cash.
Once a pension fund is moved to a QROPS, the lifetime allowance of £1 million no longer applies, so the fund can swell to whatever size the retirement saver wants without fear of any tax penalty.
Once in a QROPS, managing pension money is important.
Moving the money out just to sit in the bank is not a good idea.
The QROPS tax shelter is lost and instead of an opportunity to grow inside the pension wrapper, the money is subjected to meagre interest rates.
One good move is paying down debt. Taking some cash free cash to repay lenders works so long as the pension saver is disciplined and replaces the tax-free lump sum with the money which would have gone to debt repayment.
If a few years are left until retirement, borrowing from your pension can save a lot of interest payments while the money that would have serviced the loan can go back into the pension.
Expats do not have to worry about the rights and wrongs of managing their pension – just stop and think before spending pension cash whether finding the cash from elsewhere may have proved more financially sensible.