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Pity the poor pensioners, in their 50s or 60s, approaching retirement. Annuity rates are falling so fast that anything but a really large pension pot will hardly deliver enough income to pay for the family car, never mind that cruise they had set their hearts on. And in many countries the tax authority will not allow you to cash in your pension pot on the grounds that it is tax-privileged money, plus a dose of nannying - if you take the money and spend it, goes the reasoning, you will fall back onto state support.

One of those countries is the UK, where retirees are allowed to take 25% of their pension pot in cash, with the rest being compulsorily devoted to the purchase of one of those pitifully small annuities. British expats, who have fled the country's horrid climate and prevalent yobbish culture for nicer, warmer places, are in a particularly bad plight financially, with the pound plunging against most other currencies, and especially the Euro, so that their original calculations, which would have allowed them a comfortable retirement in that house in Cyprus they have pinched and saved over thirty years to purchase, have been blown out of the water.

But wait! There is a silver lining for some people, and it's called a QROPS. If a British citizen has become non-resident on a permanent basis, and has no present intention of returning to the UK, they can move their pension fund out of the UK to another country, and it doesn't have to be the country they are living in. For the first five years of non-residence, the fund will remain subject to HMRC's rules, but after that the rules that apply will be those of the destination country of the fund. Such a transferred fund is called a Qualified Recognized Overseas Pension Scheme.

It's a lot more complicated than that, of course, but the eventual benefit is that many countries allow the use of pension funds for the purchase of a house, or in some cases even allow the retiree to withdraw the whole fund in cash.

Who Can Benefit From A QROPS?

Obviously, the first qualification is that it is necessary to be already non-resident, and to be able to demonstrate, if asked, that this is a permanent state.

The second qualification is that the individual concerned should not already have retired and taken an annuity. That is usually an irreversible step. You can't normally turn an annuity back into cash.

The third qualification is that there should be an identifiable and moveable pension fund. In theory, pension fund assets of various types can be transferred, eg investment holdings in addition to cash and cash equivalents, but the process will be easier, the nearer the assets are to being cash.

'Final salary' (so called 'defined benefit') pension schemes present difficulties. Although most types of public sector pension scheme do have a cash commutated transfer value, which can be used for QROPS purposes, the transfer values are often unattractive, and will not secure an income which measures up to what would have been payable in the UK. Advisers are often reluctant to recommend taking a transfer value, for this reason. Of course, if the choice is between having a British pension in deflating pounds and a lump sum to spend as you wish, the cash will often win, even if the true bargain is not a very good one.

Public sector pension funds are in fact very happy to see departing members take transfer values, since it is a good bargain from their perspective. These schemes are almost never 'funded', but are 'pay-as-you-go', so that if a member leaves with a paltry lump sum, the scheme is free of the costly future benefit stream that would have to have been financed out of current revenues. It is of course one of the most disgraceful frauds practised against the general citizenry of a country that the inflation-proofed pensions of civil servants, parliamentarians and countless other groups of 'public sector' workers are financed on a 'pay-as-you-go' basis. It puts one in mind of W C Fields' famous question: 'What did posterity ever do for me?' Plenty, is the answer, if you are a British civil servant!

Although final salary pension schemes in the private sector are fully-funded (if the actuaries have been doing their jobs), only in rare cases are the funds attached to individuals. That's to say, there is one fund and it covers the present value of all the annuities that are going to have to be paid out. The trustees of the fund (most pension schemes are set up under trust) will not normally agree to segregate portions of the fund and attach them to sub-populations of members. An exception to this might be where the subsidiary of a large company is being bought out, and the appropriate portion of the overall pension fund will rightfully follow the individuals who move. These situations are not well covered by the law, and everything is down to the negotiating process: the head trustees will do their very best to minimize the amount of the fund that they will 'lose'.

As with public sector schemes, transfer values are often available for individuals who leave private sector pension schemes; but they are usually even less attractive than the public sector equivalents, and the same cautions apply.

If you work for the overseas subsidiary of a UK plc and the staff are all resident outside the UK, you could have a go at a corporate QROPS. This isn't actually as far-fetched as it sounds: many QROPS have already been set up by larger companies for their overseas staff, and the process is well understood, although usually these will be contribution-based schemes, ie defined contribution rather than defined benefit schemes. The advantage of a defined contribution scheme from this perspective is of course that each member of the scheme has their own, portable 'mini-fund'. But in theory there is no reason why a defined-benefit scheme shouldn't be split off into a QROPS, if management is willing.

So the bottom line here is that you can only take advantage of a QROPS if your pension is 'portable', in the normal sense of the word.

The state old age pension is an example of a pension which is not 'portable'. The Government is never going to allow the encashment of the present value of the deflating annuity it pays expatriates. It wishes it didn't have to pay them at all, and it was only pressure from the EU that forced the Government to give annual uprating to expatriates' pensions, if they are living in the EU. When pensions return to being 'cost-of-living' linked, rather than the 'average wage' linking that is currently in place, it will apply to all pensions paid in the EU.

Where Can You Take A QROPS?

Anywhere, really. They are very well behaved, even if they do sound like like some sort of small dinosaur. That's to say, your place of abode doesn't affect your ability to have a QROPS, as long as you don't live in the UK.

There are limits however to the list of countries which are suitable destinations for QROPS. HMRC has to approve destination pension fund administrators, and once it has done so, that administrator is 'Recognized'. There is quite a large number of countries which have approved pension fund administrators. and HMRC even publishes a list of them. When you look at this list, you need to distinguish between corporate QROPS as described above, and the types of administrator (often trust companies) which will accept individual fund transfers. It's usually quite easy to do this from the name.

The list of approved (recognized) QROPS operators is however a moving target, because HMRC tries to police the behaviour of administrators on the list, and has removed some countries where administrators went outside its rules, for instance by allowing full cash withdrawal before the expiry of five years of non-residence.

Countries on the list that are commonly used for QROPS include Guernsey, the Isle of Man, New Zealand, Australia and Ireland - there are forty of them altogether. From HMRC's perspective, Guernsey is a star pupil, because it applies HMRC's 25% cash takeout limitation even after the five years is up. Guernsey does however allow 100% of a fund to be used for a real estate purchase, from the beginning. The kicker is that this will have to be done through a limited company subsidiary of the Guernsey trust, and you are looking at considerable set-up and ongoing administration fees; plus in some countries, for instance in Italy, corporate ownership of a property brings with it considerable tax problems, along with some inheritance law advantages.

What Are The Mechanics?

You need to have a British IFA (Independent Financial Adviser) to pull the strings. Probably you have one already, if you have a private pension fund, but they are easy enough to find, especially nowadays, hanging round almost every street corner, desperate for business. But not all IFAs know about QROPS, so before you decide on one in particular to go with, make sure that they know what they are doing and change horses if necessary. Ideally, the chosen IFA will have a presence in the remote jurisdiction which is going to be the destination for the QROPS transfer, although this is not a legal requirement in any sense, and there are not so many IFAs with a global presence.

The IFA will act as a clearing house for the paperwork. The first step, evidently, is to select the destination country for the QROPS and to pick a pensions trust administrator in that country. This needs close attention, since most advisers tend to have their own favourites. You will be very well advised to do your own direct research before accepting any recommendations that are made to you.

The IFA will also advise you on the process of extracting the pension fund from your pension provider, including if necessary the conversion of illiquid assets into more liquid ones. This may or may not be necessary or desirable; but the setting up of the QROPS is a good moment at which to reconsider the assets you wish the fund to hold. The views of any trustees need to be taken into account at this point, and you also need to establish whether the consent of the trustees is necessary. Usually this will just be a formality, but there are cases in which consent might not be readily forthcoming.

The IFA will construct the pile of documentation that is going to be needed, and take you through it. It will include an agreement between you and the IFA, a consent and instruction form for the provider (an insurance company or possibly the trustees of the fund), and an agreement with the remote trust or pensions administrator. That brings up the question of what you want to happen: perhaps you want to continue with the fund as it stands, and use the greater investment freedom to vary your types of asset; or maybe you want to make a property purchase; or maybe you want to strip out as much cash as possible. This will all depend on your circumstances and the destination country; but these decisions need to be made, and appropriate paperwork generated before the transfer takes place. Remember that, once the fund has left the UK, it is no longer the responsibility of the IFA, unless they happen to have an office in the destination country, although they will remain liable for any advice they have given you.

The IFA will then present the documentation to the pension provider, some of it having passed through the remote pensions or trust administrator, and the provider will take anywhere between two weeks and two months to complete the process of preparing your fund for transfer. What happens then depends on what you have agreed with the remote administrator.

What Will It Cost?

This is not a cheap process. There are a number of stages, outlined below, at which costs may be incurred. As a general rule, if you want to end up with a cash fund in a remote destination, to use as you wish, you should assume that it may cost up to 10% of the value of the fund. If you want to continue with a comparable fund, but simply in different hands, it may be significantly less than that.

The costs:

• The existing UK pension provider may make exit charges for preparing and processing the transfer. This depends completely on the nature of the fund and the investments it has.
• The IFA will charge between 3% and 5% for orchestrating the process, depending on its complexity.
• The remote fund administrator may make entry and exit charges, depending on the particular process you have agreed; these may be in the range of 1% to 2% of the fund.
• There may be initial and ongoing trust and corporate administration charges in the remote destination, although in some destination countries there is no need for a complex structure, particularly if a cash alternative is being offered.
• There may be bank and foreign exchange costs involved in the transfer process, especially if more than two currencies are involved.

Be Careful!

That's obvious, of course, in all situations. But the QROPS transfer process does have quite a few potnetial dangers of its own. You need a good IFA, naturally, but once the fund has left the UK, you need a comparable adviser in the remote destination, unless you are merely using the remote trust administrator as a 'post office'. Even then, you should satisfy yourself that they are trustworthy. And you should make very certain that during the transfer process itself, your fund does not pass outside the control of the trusted parties you have included in the process.

It should also be said that HMRC has considerable reservations about some of the QROPS channels currently being exploited, particularly when they involve full cash alternatives, and may move against individual fund-holders who use what it considers to be unacceptable schemes. This danger exists during the first five years of non-residence, but after five years there is nothing that HMRC can do, unless of course you return to the UK!

All of that said, the costs and difficulties of the QROPS process are well worth accepting if the result is to prise your savings out of their restrictive UK strait-jacket!