Living overseas from the UK can now provide you with some excellent financial benefits apart from better weather. Following massive reforms introduced in April 2006 individuals with one or several dormant pensions in the UK now have a choice over where and how their pension is invested and how funds can be withdrawn from this. By transferring to an alternative pension structure such as a SIPP or QROPS, many potential benefits can now be realized.
What Is a Qualified Recognised Overseas Pensions (QROPS)?
QROPS are recognized pension schemes that Her Majesty´s Revenue & Customs (HMRC) deem qualifying, and therefore transfers to QROPS from existing schemes are not charged or taxed, subject to lifetime allowance.
The ability to transfer a pension from the UK to another country was brought into action on 6th April 2006. Under these changes people no longer resident in the UK, but who had UK pensions, were allowed to transfer their pensions across to a QROPS, provided they met certain conditions.
In Order to be recognized as a QROPS the overseas pension scheme must meet some rules set out by HMRC:
- Cannot be a UK registered pension scheme
- Must be established outside the United Kingdom
- Must be regulated as a pension scheme in the country in which it is established
- Must be recognised for tax purposes as a pension by the country or territory in which it is established
Main benefits of switching to QROPS includes:
- No compulsion to buy an annuity- If you choose a QROPS transfer, you do not have to buy an annuity
- Inheritance tax benefit- QROPS are not subject to UK IHT upon the member’s death
- No income tax charge on death- With a QROPS scheme there is no income tax charge imposed on the payment of a lump sum to the member’s dependents on the member’s death providing they are not UK resident. Usually, lump sum death benefits for the over 75′s are subject to 55% tax charge in the UK.
- No Lifetime Allowance Charge (currently 55% if taken as a lump sum or 25%+ standard income tax rates if taken as income)
- Consolidate existing pensions
- Taxation benefits- You can choose to take a QROPS to a country that has substantially lower taxes.
- Investment choice – QROPS can offer access to an extremely wide choice of investments. This could be particularly useful if the client wants to invest in assets which will more truly reflect the currency and inflation factors relating to where they plan to retire.
- 30% Tax Free Lump Sum- British citizens can take a lump sum of 25% from their scheme in the UK. Under QROPS this can be set higher at 30%.
- Protection from currency fluctuations
Who Qualifies for a QROPS Pension Transfer?
- Any citizen between the ages of 18 and 75 may apply for a QROPS Pension Transfer of an existing or ‘frozen’ UK/EU pension
- Any non-expatriate citizen provided that you have a clear intention to become an expatriate within the next 12 month
- A QROPS Pension Transfer may also apply to ANYONE who has officially worked in the UK or any EU member country for any length of time
How our process works
If you have an interest in QROPS we will provide a free and comprehensive pension transfer analysis report. This report is individually tailored to your own personal circumstances. This analysis report examines your current scheme to find out the following items:
i. Current Value
ii. Annuity requirements
iii. Max drawdown
iv. Scheme rules
v. How your pension is invested and its performance
vi. Earliest age you can access your fund
vii. Current Scheme Charges
viii. PCLS (tax free lump sum amount)
ix. Tax implications
x. Treatment upon death
xi. If a DB/Final Salary Scheme, a TVAS can be provided
Taking into account the above points, if a transfer path is deemed applicable and advisable, your QROPS options are then explored in more detail.
Popular QROPS jurisdictions
A QROPS Jurisdiction is the country where a pension fund is located, and therefore the tax laws, and other laws, which would affect the scheme’s governance. The QROPS Jurisdiction should be a secure jurisdiction, have strong investor principles similar to the UK and should offer significant improvement in investment and benefit options available. Our experts will advise on the best jurisdiction for you. A jurisdiction such as the Isle of Man, Gibraltar, Malta or Switzerland would be optimal, as they offer tax efficiency and flexibility.
A Qualifying Non-UK Pension Scheme (QNUPS) is an overseas pension scheme in which cash and assets that have tax relief abroad can be contributed. QNUPS regulations were introduced by UK HM Revenue & Customs (HMRC) in 2010 to provide significant opportunities for British Domiciles, irrespective of whether they are resident in the UK or are expatriates. British citizens can now use QNUPS as a financial planning tool, and avoid the restrictions that are applicable to other UK pension plans. In the appropriate circumstances huge Inheritance Tax (IHT) exemptions and savings can be made from this scheme, especially if you are a high net worth individual and are incurring massive amounts of tax on your assets.
QNUPS can offer some great benefits, especially with regards to drawing funds from your wealth in a tax-efficient manner. For individuals who have insufficient capital within their existing pension scheme to provide them with a comfortable level of income in retirement, QNUPS offers an opportunity to top-up on the overall amount of assets that need to be set aside for a comfortable retirement.
The key points of a Qualifying Non-UK Pension Scheme:
- Depending on your circumstances, it may be possible to contribute to a QNUPS after you have retired.
- The pension fund can be used by the member during his lifetime and any remaining balance can be passed on to their chosen heirs upon the member’s death.
- To make a contribution to the scheme you need not have any earned income from employment.
- There is no maximum contribution that can be made into a QNUPS as there is no tax relief on contributions made.
- QNUPS contributions should be appropriate to your circumstances.
- The funds held within the QNUPS grow tax-free with the exception of non-reclaimable withholding tax on UK dividends or rental income arising from UK property.
What are the advantages offered by a QNUPS?
- QNUPS protect you and your heirs from IHT (Inheritance Tax). Otherwise you are liable to pay up to 40% tax on the assets you hold and this needs to be borne by your heirs after your death
- Tax efficient pension planning for wealthy individuals
- QNUPS generally grow free of Capital Gains Tax and other taxes
- QNUPS is not subject to UK Pension Sharing Orders on Divorce
- Much more tax efficient than owning assets personally
In order to access funds held within your QNUPS, if you are above 55 you are eligible to withdraw up to 30% of the overall value of your QNUPS as a non-taxable lump sum. Before age 55 you can withdraw this cash also usually tax-free as a loan.
On your death, the funds pass on to your heirs/beneficiaries and no inheritance tax is incurred. Also your heirs will be able to access their inheritance immediately instead of having to wait for the seven year qualification period to run out as is the case with other inheritance schemes.
Qualifying non-UK pension schemes (QNUPS) were created by the Inheritance Tax Regulations 2010, which came into force on 15 February 2010. However, it is only since the introduction of annual and lifetime allowances on pension contributions, which effectively limit the amount individuals can contribute to their pensions tax-free, that QNUPS have become an attractive form of ‘top-up’ retirement savings plan.
Currently, the maximum amount payable into a UK personal pension scheme on which tax relief is available is £50,000 annually, or a lifetime allowance of £1.5m. These allowances will be cut further after April 2014 to £40,000 and £1.25m respectively. While contributions to a UK scheme paid in excess of these allowances are unlimited, there is a tax charge on them, making additional contributions unattractive.
Therefore, high net worth UK resident individuals who have already used their annual and lifetime allowances, but wish to save more for their retirement, might consider a QNUPS. QNUPS are also ideal retirement savings vehicles for expatriates planning for their retirement, who may wish to return to the UK in future.
Annual and lifetime allowances do not apply to a QNUPS. Therefore, subject to contributions being deemed appropriate to the person’s circumstances, there is no limit on the amount an individual can add to their QNUPS to fund their retirement. This is because there is no tax relief on the contributions going into a QNUPS.
Another advantage of a QNUPS is that contributions do not have to come from employment relevant income. Contributions must be proportional to the individual’s overall net worth (i.e. not more than 50%).
However, this means that independently wealthy individuals, whose income is not necessarily derived as a direct result of employment, can also shelter funds for their retirement by using a QNUPS.
A wide class of assets can be held by a QNUPS. This includes cash, quoted and unquoted securities, private equity, commercial property and residential property, although not your main residence. It is important to note, however, that a transfer of UK property into a QNUPS would be a ‘deemed’ disposal for capital gains tax purposes, which may trigger a tax liability at current rates.
One of the main advantages of a QNUPS is that the value of the fund does not form part of an individual’s estate on death and so is not subject to UK inheritance tax.
Let us say, for example, an individual identifies that, in addition to their UK pension, they will need to set aside an extra £2m to fund their desired lifestyle in retirement. If assets were simply held and invested in their ‘own name’ then, on death, (at 2013 rates) as much as 40% above their tax threshold (£325,000 per spouse) would be liable to inheritance tax.
If, however, this sum had been invested through a QNUPS, the fund would be outside the estate for the purposes of calculating inheritance tax and the person’s family would receive the benefit of this.
Therefore, by saving for their retirement through a QNUPS, wealthy individuals can provide for their own future, while protecting assets for the longer-term benefit of the family.
Capital gains and income tax
During the lifetime of the QNUPS, any growth in the fund is free of capital gains tax and there would be no UK income tax on non-UK source income. As regards administration, a QNUPS does not require registration with HMRC.
Also, because the transfer in is out of post-tax earnings, or from personal capital, there are no reporting requirements. Provided the QNUPS is administered in a recognised overseas jurisdiction, such as Guernsey, it will be considered a qualifying pension and classed as a recognised overseas pension by HMRC.
When it comes to extracting funds from the QNUPS on retirement, currently individuals can receive an income from their QNUPS at any time between the ages of 55 and 75.
At this point, at least 70% of the pension fund must be used to provide a retirement income for life. However, up to 30% of the fund value of the QNUPS can be taken as a tax free lump sum and there is no requirement to purchase an annuity.
Another advantage of a QNUPS is that income is paid out gross. The accounting treatment will depend on where the member is resident, so if they are non-resident then UK income tax will not be payable. Even if they are UK resident, under current rules, any income would attract a foreign pension allowance of 10%. This means that only 90% of the income would be taxed.
While it is important any contributions made to a QNUPS are proportionate, taking into account both overall wealth and other existing pension rights, they are a highly flexible and tax efficient structure that can be used to supplement existing pension arrangements.
Wealthy UK residents and expats alike can, therefore, continue to make sufficient provision for their retirement through a QNUPS, while protecting the fund for the long-term benefit of their family.