What is QROPS?
By Spectrum IFA
This article is published on: 23rd April 2015
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A QROPS (Qualifying Recognised Overseas Pension Scheme) is an overseas pension scheme that meets certain requirements set by HMRC and follows the same standards or equivalent as a UK pension.
Most expat UK pensions can easily be transferred into a QROPS, as long as the overseas scheme is registered with HMRC and is fully compliant with the standards of the jurisdiction it is domiciled in. QROPS’ profile was increased after HMRC introduced a series of new pension rules on 6th April 2006.
• Putting your pension into a QROPS will give you a greater level of control over the way your pension fund is invested. You can consolidate a number of different pensions into one QROPS pot and you will not have to buy into an annuity.
• QROPS will also let you bestow the rest of the fund to your beneficiaries without any deduction of UK tax upon death, as long as you have spent five years or more living outside the UK.
How secure is your pension? The global recession and credit crunch have created a lot of concern about investments. And for most people pensions involve very large investment decisions. You could already be receiving a pension income, but is it working hard enough for you? Or are you one of the many people with a deferred pension. There can be risks involved, even with final salary schemes. Falling stock markets and increased life expectancy have put a great strain on these schemes with most being closed to new members. We recommend that all expatriates with a UK pension review their fund carefully, and consider all the options. Particularly as non-residents have the opportunity to move their UK fund to an international pension.
What is an International pension? New UK legislation has created international pension products known as Qualifying Recognised Overseas Pension Schemes(QROPS). In essence, QROPS must mirror the UK requirements for pension commencement lump sum and income benefits. HM Revenue & Customs (HMRC) will only allow overseas transfers to schemes that have an official QROPS status. Careful consideration needs to taken when considering a transfer, as HMRC are aware of some jurisdictions promoting the scheme as a blatant way of tax evasion (ie Singapore, which was delisted by the HMRC in 2008).
We work closely with the authorities concerned to help our clients be placed in the most appropriate jurisdictions.
So what are the benefits of QROPS?
• Potential freedom from UK tax upon death, even after the age of 75 (Finance Act 2008)
• Transfer of the fund to future generations upon death with the potential avoidance of current UK tax charge on residual fund. If the member is over the age of 75 at death, the beneficiary will be taxed at their marginal rate of income tax on any income from the fund, or at the rate of 45% if the whole of the fund is taken as a lump sum. From April 2016, lump sum payments will be taxed at a beneficiary’s marginal tax rate.
• Flexibility to access funds at any time between the ages of 55 and 75.
• Access to income and capital without deduction of tax.
• No deduction of tax at source. However, taxation may apply in the member’s jurisdiction of tax residence.
• Reduction of currency risk by transferring the funds to Euros, for example if a client lives in Europe and will be spending Euros in their daily lives.
• No requirement to buy an annuity
Example when QROPS is a good idea
A Client is aged 65 and lives in France and has done so for more than 5 full UK tax years.
The client has no intention to return to the UK.
The client wishes to take the maximum Pension Commencement Lump Sum (PCLS) and immediately draw an income from the remaining pension fund.
The existing UK pension scheme is a Money Purchase Scheme and does not have any guarantees attached to it. The client is being charged 1% per annum plus annual fund management charges by their UK provider and the pension has a transfer value of £200,000.
In the event the client passes away they wish their pension fund to pass as a lump sum to their spouse. Were they to pass away after age the age of 75, the fund would be subject to a 45% UK tax charge before being passed on to their widow/widower. (from 2016 both income or lump sum benefits would be taxed at the beneficiary’s marginal rate of income tax).
Following a detailed analysis of their UK scheme, including the cost and tax implications, the client decides to go ahead with a transfer under the QROPS provisions to a Malta registered and recognised provider.
The QROPS costs are £645 for the set up fee and £845 per annum (in some cases these fees can be less).
The investments are administered for a cost of 1% per annum plus annual fund management charges.
The client receives 30% of their pension pot as a PCLS, which is taxed in France at a rate of 7.5%. Had the client left their pension in the UK, they would be able to take only 25% PCLS and it would still be taxed in France. He then draws an income of 150% of UK GAD rates, which is paid to them gross by the Maltese QROPS provider, as Malta has a Double Taxation Treaty in place with France.
Then they declares this income on his French Tax return. The funds used in their portfolio are all purchased without initial charges or commissions.
These funds are all daily traded and none are subject to any penalty charges if they are sold. The funds purchased to provide income are managed by some of the very top investment houses in the business; for example, BlackRock, JP Morgan Asset Management , Jupiter Asset Management, Kames Capital and Henderson Global Investors.
Cons:
• The additional costs are only the £645 set up fee and an £845 annual charge.
Pros:
• The client has been able to withdraw an additional 5% of the fund as a PCLS. • Upon death the client’s pension pot will pass in its entirety to their widow or widower. • The client is able to mitigate potential currency risks. • Increased Flexibility (i.e. a normal Personal Pension Plan does not allow drawdown) • Consolidation of pension plans making them easier to manage
Example when QROPS is not a good idea
A client has a Section 32 pension. • The client is coming up to retirement age, they do not live in the UK and have no plans to return.
• The client’s main requirement is a high income and as they have no children they are not so worried about the death lump sum.
• Having analysed the pension we find out that it provides a Guaranteed Annuity Rate (GAR) of 8.7% per annum for life. (Note* this is not the case with every Section 32 pension).
• Our view is that this is a very good income rate, especially when compared to current annuity rates which are very low.
• Transferring to a QROPS would mean this GAR is lost and then any future income will be based on normal income drawdown rules.
Therefore we recommended that this particular client should leave the pension where it is in order to enjoy this high guaranteed income rate.
Our advice would not always be the same for every client as there would be restrictions to when annuities could be taken, the spouse’s benefit would have been minimal and there also would be no death lump sum for any other beneficiaries. So this solution would not be ideal in every case.
A client’s aims and objectives will drive the advice as for some people it may have been better to transfer this plan. This is why we fully review each individual pension plan and discuss with our clients what the benefits are, what the options are and what might be best for them depending on whether they require a higher lump sum, higher income, better spouse benefits, better death benefits for children, require income earlier than age 60, as many GARs are only applicable at age 60 etc.
The importance of each factor will vary depending on whether a client is married, has other income or cash available, has children, whether they are divorced and re-married, their risk profile etc.
Other reasons not to transfer:
• Fund value below £50k – expense ratio too high.
• Final Salary – the client wants the stable income with inflation increases and is happy for the pension to stop on the death of both the client and their spouse.
• Guarantees attached. – The pension has a Guaranteed Annuity Rate (GAR) or Guaranteed Minimum Pension (GMP) – i.e. the annuity could be in the region of 8-10% for life or the client could have a guaranteed income which is also in this region. (although with the latter the fund growth can increase to make the guaranteed income less attractive, you don’t know until retirement date, with the annuity you always get the % so if the fund goes up the % stays the same.
• The pension has an enhanced lump sum.