This article is especially for British olim with UK pensions.
Her Majesty’s Revenue and Customs (HMRC) in the UK introduced Qualifying
Recognized Overseas Pension Schemes (QROPS). The idea behind these was to allow
more flexibility for UK expats to move their pension out of the
Essentially, since 2006 you could export your pension to a
tax-neutral territory such as Guernsey. There are other territories that you can
move your pension to, but Guernsey is apparently the favored location for the
majority of transfers.
The way that the UK tax rules interact with the
Israeli tax system means that UK olim can particularly benefit from having a
There are a number of benefits from exporting your pension to a
QROPS. These can be split into two categories: during your lifetime and on
Currently, new olim benefit from a 10-year tax
holiday on moving to Israel. However, one of the quirks of the current tax
treaty between the UK and Israel means that UK olim must continue paying tax on
their UK pension income in the UK or Israel, even during their 10-year tax
holiday. Thus, pensioners continue to pay tax on their UK pensions
The UK pension payer deducts UK tax at source unless the
oleh recipient provides confirmation from the Israel Tax Authority that the
pension is subject to Israeli tax. There has been talk of a draft new
UK-Israel tax treaty that would resolve this, but unfortunately that has been
stalled by Middle East politics.
But if you move your pension to a QROPS,
then all income payments would be made from Guernsey and no tax will be deducted
in the UK. Thus, your pension income can be truly tax-free in the UK and Israel
for the first 10 years of your aliya.
There are other possible
advantages, such as increased flexibility and greater investment choice.
However, the main lifetime benefit of a QROPS for olim is the removal of income
tax for 10 years.Death benefits
As for death benefits, HMRC changed the
the UK rules last April for anyone who dies with a UK pension. At the same time,
they abolished “compulsory annuitization.” Under the new rules, if you
die before age 75 and have a UK pension entitlement that you have not started
taking an income from, then this pension can be passed to your family with no UK
tax charge. If you have started taking an income or you are over age 75
(regardless if you have started an income or not) there will be a 55 percent
“tax recovery” charge applied to the value of your pension. In other words, only
45% of the pension fund can be passed to the family.
If you move to a
QROPS and are outside the “reporting period” (very important, see below) then
you can pass on 100% of your pension fund to your family tax-free. There is no
distinction whether you have taken an income or are over 75. Everyone who is
outside the “reporting period” can pass on their pension fund tax-free. This is
another major advantage of having a QROPS.
However, HMRC has not been
happy with the perceived abuses of the QROPS system. There have been schemes in
Singapore, Hong Kong and New Zealand that have caught the eye of HMRC. Some of
these schemes allowed people to “cash in” their pension pots and take out their
entire fund in one tax-free lump sum. This goes against the whole point of a
pension, which is designed to provide an income for life. This has annoyed
Therefore, a few weeks ago HMRC surprised the QROPS industry with a
new set of rules that are due to come into effect this April 6. They are
changing the “reporting period” as well as some other rules that will force
territories such as Guernsey to modify their own pension rules to
The “reporting period” is the time that the UK pension must
continue to follow UK rules even after transfer to the QROPS. Currently, for
five years after a person emigrates, his or her pension must continue to follow
UK rules on death, and the income can still be tax-free during this time.
However, under the new rules, the pension must follow UK rules for 10 years
after transfer. Thus, the new rules put the time limit on when the person
transfers to a QROPS, rather than from when they left the UK. This will have a
huge impact on olim.
For example, take someone who left the UK for Israel
four years ago. If they move their pension to a QROPS now, they will be free
from the 55% death charge in a year from now. If they wait and move to a QROPS
after April 6, they will need to wait 10 years from the transfer date to be free
of the death tax.
Another example, take someone who has been in Israel
for eight years, if they move to a QROPS now, they are free immediately from the
UK 55% tax charge (been out of UK more than five years). If they transfer after
April, they will be subject to 55% tax charge for the next 10 years.
you can see, the new QROPS rules could have quite a negative effect on olim.
Unfortunately, HMRC has not given people much time to act before the new rules
come into effect. The average time it takes to complete a transfer into a QROPS
is approximately six to eight weeks.
Thus, if anyone wants to move to a
QROPS under the current and more favorable rules, they need to start the process
within the next few weeks.
Please note that state pensions, pensions that
have been annualized and company pensions that are in payment (excluding SSAS)
cannot be moved to a QROPS.
Pension transfers are extremely complicated,
so it is essential that you take the appropriate advice from a suitably
For further information about these
major changes to UK pensions, readers are invited to attend seminars with
leading speakers in this field in Netanya on January 16 at 5 p.m. (Young Israel
Shul, 39 Shlomo Hamelech Street) and in Jerusalem on January 19 at 10 a.m.
(Nefesh B’Nefesh Building, 5 Nahum Hefzadi Street, Givat
Attendance is free, but you must register through the Nefesh B'Nefesh wesbite
or by calling (03) 612-3153.
With thanks to Simon Benarroch, QROPS
technical adviser to Fairbairn Trust Company Guernsey, for help with this
As always, consult experienced tax advisers in each country at
an early stage in specific firstname.lastname@example.org
Leon Harris is a certified
public accountant and tax specialist at Harris Consulting & Tax Ltd.