Your tax-free capital turns taxable in UK

This week's patient is 42-year-old Sarah Smith from the UK. Marketing Director Sarah has lived in Dubai with her two children for more than five years and still pays into her UK pension, which she has kept going for over 20 years.

"I have been advised to look into a fairly new pension alternative called QNUPS,"?she writes. "I have searched online and have found some pretty confusing explanations as to what it is and how it can help me. Could you possibly spell out its benefits and disadvantages in very simple terms. Also, if this is the right move for me, how exactly would I go about switching my current pension to this scheme?" She says her pension is her only real retirement savings plan, so it is naturally very important to her. She also wants to know whether her investment would be just as safe as it is at present.

Sarah, firstly, the good news for you is that you have been paying into a UK pension for the past 20 years, which will have grown to a sizeable sum. An individual can contribute to a UK pension while a non-UK resident, but I would not recommend this. The reason why is that you are turning your tax free capital into taxable income in the UK. You will not receive tax relief on your contributions as you are a non-UK resident and when you come to take your pension it will be subject to UK income tax unless you move it to a qualifying overseas scheme. Many expatriates will be aware of legislation introduced in the UK in 2006 introducing QROPS (Qualifying Retirement Overseas Pensions Schemes), which allows individuals with UK pensions to transfer these pensions to overseas schemes that have passed Her Majesty's Revenue and Customs (HMRC) tests and adhered to regulations. These pensions are then generally free of UK income tax assuming the individual retires outside of the UK.

QNUPS (Qualifying Non UK Pensions Schemes) is very new and came from legislation introduced in February 2010 to ensure pensions transferred to QROPS receive the same inheritance tax treatment as UK pensions. They are very similar to QROPS in terms of tax advantages and follow similar HMRC rules as QROPS, except that a QNUPS may invest in residential property and a QROPS cannot.

I would suggest if you wish to consider taking advantage of some of the benefits of QROPS/QNUPS, please ensure you contact a qualified financial adviser who will arrange a transfer quote from your UK scheme and discuss the pros and cons of the transfer. You will need to appoint a new trustee who offers a QNUPS/QROPS who will then deal with your previous UK pension provider, working closely with your financial adviser.

- Independent Financial Advisor Gavin Smith analyses readers' portfolio for Emirates Business. He is Area Manager for consultants PIC, a member of the deVere Group of companies. Write to him at money@business24-7.ae