Gary Timmins
of The Spectrum IFA Group - QROPS Advice
 QROPS Advice
Legislation introduced in April 2006 gave the ability for a UK pension to be transferred to an overseas pension, PROVIDING it meet certain qualifying rules. These rules were to ensure the overseas pension broadly followed the UK legislation. This following of the UK rules was seen as a justification for having given UK tax relief on payments into the pension scheme in the first place.
QROPS or Qualifying Recognised Overseas Pension schemes can give several benefits to the individual expat. For the first 5 years of the new pension the trustees of the new pension scheme have to report once a year to the UK Inland Revenue to confirm continuing qualification with the rules. After 5 years the reporting requirement falls away and if the pension is then moved there is no requirement to report to the UK and no loss of UK tax relief. It is therefore possible to transfer your fund to another pension which does not require you to purchase an annuity.
Why is not purchasing a pension annuity a good idea?
A pension annuity means that you give your capital, the amount that you have built up in your pension less any tax free cash you are allowed to take, to an annuity provider who will guarantee you a lifetime income (your pension); no matter how long you live. There are pros and cons to this. You know how much income you are going to get and you know you will get this for life. Unfortunately, the amount of interest you get reflects interest rates. The current low levels of interest rates have meant many people have had smaller pension income than they might have hoped for.
The thing that people hate about annuities
Unfortunately, when you buy an annuity your capital is gone forever. This is the trade off for getting a lifetime income. It is why pensions are given tax relief because the State (applies to many countries, not just the UK) know that you cannot "squander" your hard earned pension fund; you have to be given an income. This helps reduce your dependency on the State.
Is this why QROPS are so popular?
After 5 years of membership of the scheme it is possible to move your pension fund into an alternative investment where you do not have to buy an annuity. The example below shows why QROPS are so popular with people.
|
UK Pension |
Post QROPS |
Pension Fund |
€250,000 |
€250,000 |
Annuity Purchase |
€250,000 |
Nil |
On Death, amount left for family |
Nil |
€250,000 |
This is a very simplified example. There are many more factors to take into account yet it does show that it is possible to leave a significant legacy to one's family with this option. It is also no coincidence that all the great families, be they British, Catalan or Spanish, take into account "family" financial planning to leave as much as possible to their heirs. This includes, unsurprisingly, many families of politicians!
Careful QROPS
This is a specialist type of planning and should not be entered into lightly. Advice from a suitably qualified adviser is essential. You should also be aware that the take up of this type of planning has probably exceeded the UK Revenue's expectations and therefore further changes and restrictions are possible in the near future to this type of planning.
QROPS - the 5 Year Rule, A warning
In the legislation that introduced QROPS there were two qualifying conditions, both having a 5 year requirement. One requirement was for a person to be non UK resident for 5 years before they could make changes to the QROPS and either take the cash or move it to a non annuity requirement investment. The other requirement was for the trustees of a scheme to report to the UK Revenue for a period of 5 years during which time the scheme must stay as a qualifying scheme.
We admit there is some ambiguity in the legislation. However, some people are using the 5 year non residency basis as the controlling rule. For example, someone who has been non-resident for 4 years is entering a QROPS and taking the money out as cash after a further year, i.e. after 5 years non residency.
Do not do this OR join any QROPS scheme that is doing this. IF, and again it is accepted that it is an IF, the ambiguity is decided in favour of the 5 year scheme reporting requirement (and not the 5 year non residency) the consequences for your pension are dire. You will suffer UK tax (even though you do not live in the UK any more) of between 40 to 55%. In the above example, on a pension fund of 250,000€ this will cost you up to 137,500€. Err on the side of caution and expect to have to keep your QROPS.
QROPS Rules for UK Pensions
QROPS rules are the rules which determine whether or not an overseas pension is given the status of Qualifying Recognised Overseas Pension Scheme (QROPS). When expats are considering transferring their pension from the UK to an overseas pension many concentrate exclusively on these rules. However, as we show below, there is much more to making a successful QROPS than just the qualifying rules.
Rules
The Rules required to meet the Qualification standard are well documented elsewhere. By the time you are being offered a QROPS it will be on the UK HMRC list and will therefore be acceptable. However, even though they are accepted you should be aware of two issues. One is the jurisdiction of the QROPS. Is it a QROPS in Hong Kong, Singapore, Guernsey, New Zealand or Isle of Man QROPS? There are many other countries where QROPs are based. You do not have to live in the same country as your QROPS. So for example, in Spain you can have an Isle of Man  QROPS.
Some of these countries with QROPS are currently being investigated by the UK HMRC. Singapore has had its QROPS status removed. Others may follow.
Different QROPs countries also have variations. For example, with a Isle of Man QROPs you can take a 30% lump sum payment from your QROPs on retirement as opposed to 25% in many other countries.
The second issue and the main problem area for QROPs has been the marketing of the ability to transfer on your pension from QROPs to an investment where you can take all the fund as a single payment. Do NOT expect to be able to “pension bust” by moving to a QROPs. It is a pension after all. The main advantage of a QROPS is that you do NOT have to buy an annuity when you retire. This means any money left in your pot after your death can be passed on to your family.
Investment Choices and Options
Between now and when you retire economic circumstances will change. What is a good investment for one part of the economic cycle will not be such a good one in other places in the cycle. It is vital that you have sufficient flexibility to choose from investments that are going to be right for you. For example, as you approach retirement you may wish to move your investments to lower risk. In retirement, you will want to concentrate on getting income from your investment (your pension). A good QROPS should give you access to over 11,000 funds, generally considered to be enough for most people!!
 Ongoing Service
This is another factor which is overlooked at the start when people move their pensions into a QROPs. In addition to the change of economic circumstances mentioned above, what happens if your circumstances change? Say you move countries. Perhaps you will even return to the UK. What do you need to do to start taking your pension? In all these circumstances, and many more, you will need ongoing advice. Check this will be available to you and how it will be provided.
Retirement
When you retire you will be given a number of options. These will include how much of your fund do you wish to take up to a maximum of 25% (30% in Isle of Man). You will be given the option to take withdrawals from your investments in your QROPs ranging from zero to 120% of a figure provided by the Government Actuary Department (GAD). This maximum figure is calculated using interest rates at the time of retirement and your age amongst other factors. Sounds a bit technical but basically you will have a great deal of flexibility. A good QROPs will also allow you to vary your income in the future.
Death
Unfortunately all QROPS will have to deal with this issue. Make sure that yours allows your Spouse to continue taking your FULL pension. With many conventional pensions the widows/widowers pension is only half the main pension, or less. You should also be told what happens if the spouse wishes to take the remaining pension fund as a lump sum. Also make sure that the QROPS you choose has the option to pass on the pension fund to your children and/or grandchildren as a pension. This facility is often known as a ‘family pension’.
For information click link below:
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