When examining a transfer of a UK pension to a QROPS (Qualifying Recognised Overseas Pension Scheme), an individual would look at both the pros and the cons.
One element that is always of significant interest is the lump sum or tax free cash entitlement that a QROPS could provide. This is of particular interest for migrating members of a UK final salary scheme.
There are two common methods for providing tax free cash from a UK final salary scheme.
The first method of tax free cash calculation is, typically, a reduction of the promised pension, using a commutation factor, to provide a lump sum. This commutation factor varies from scheme to scheme, although is usually in the region of 15:1. ie every £1 of the promised pension given up provides £15 of tax free cash lump sum.
The second method, is usually a final salary pension scheme will provide tax free cash on top of a pension. This entitlement is commonly worked out by multiplying the fraction 3/80ths with each year of the member’s service and their final remuneration.
It is highly unlikely that a QROPS would use anything like these calculations for tax free cash as it is unlikely that they would be final salary schemes. Realistically, a migrant using QROPS would be looking at around 25% of their transferred funds (certainly within the 5 year QROPS reporting period) as a lump sum. Specialist QROPS advice would be required as this could be more or less then what is available from their existing UK scheme.
