Pension Transfers - don’t come a QROPper …
There seems to have been a lot of talk recently about QROPS and their uses for avoiding the need to buy an annuity with your UK pension fund or for gaining access to pension funds early. So to set the scene, let us introduce QROPS – Qualifying Recognised Overseas Pension Schemes.
Her Majesty's Revenue and Customs (HMRC) permit UK pension rights to be transferred to a QROPS. The QROPS must behave in effect as if it were a UK scheme for those QROPS members who have been resident in the UK at any time in the previous five tax years. The key attraction of transferring UK pension rights to a QROPS lies in the fact that for those who are currently in the position of having been non UK resident for at least five complete tax years (or when they satisfy that condition) this requirement falls away.
After that time the pension fund becomes subject to the laws of the jurisdiction where the QROPS is located – and for example the UK requirement to purchase an annuity by age 75 (or be faced with the prospect of a possible 82% tax charge) no longer applies. This is possibly the most important reason to investigate QROPS as it means you can pass on the benefits of your pension to your beneficiaries and avoid Inheritance Tax as well; there lies the second and compelling reason.
As a result, some have used the structure of a QROPS to access pension funds for purposes other than retirement income. Generally pension provision should remain for exactly that but in some circumstances the concept of “fund release” is appropriate.
A wide range of investments are possible within a QROPS - and the possibilities become more or less unlimited once the QROPS member has been non resident for five complete tax years or more. There is no limit to the size of funds that may be accumulated within a QROPS which was another restriction for UK pensions after 5 April 2006.
Effecting a transfer into a QROPS is relatively straight forward. Most transfers from UK pension schemes will be paid to the QROPS in cash. In other instances it may be possible to transfer existing scheme assets, but the additional costs associated with this would need to be taken account of. When it comes to taking benefits, one can access the fund from as early as 50 years of age or sooner in some instances - and with no particular limits on the amount of pension that may be taken. There is no obligation to buy an annuity from a life office and the amount of “income” required may be drawn from the fund.
Following the death of a QROPS member any remaining fund may be subject to the discretionary disposal of the scheme trustees in accordance with the provisions of the scheme rules. This will generally result in a disposal in lump sum form to beneficiaries nominated by the scheme member.
But the transfer of pension rights from any UK registered pension scheme is not a matter to be taken lightly and specialist advice is essential.
The range of QROPS to choose from that allow membership by non residents of the jurisdiction where the QROPS is established, is increasing on a regular basis. Schemes have sprung up in the Isle of Man, Guernsey, Hong Kong, Singapore, and Eire. This adds a great deal of complexity to the advisory process because it is necessary to understand the taxation and pension laws of each of these jurisdictions as well as the detailed operation of the scheme in question; as well as how all this interacts with the tax laws in the client’s country of residence.
Above all great care must be taken to ensure that the investor protection principles associated with the QROPS jurisdiction are robust. And some schemes have an artificial nature to them which risks their losing QROPS status - indeed as this article is finalized we hear that an aggressively promoted Singapore scheme may have had its QROPS status suspended or revoked.
Each scheme and jurisdiction has its own particular characteristics, for example in the Isle of Man, tax at 18% is deducted from income payments at source and it may or may not be possible to reclaim this. New Zealand funds suffer a little tax on the investment growth in the fund. And so it goes on with each jurisdiction I have mentioned. Guernsey is a favoured jurisdiction as there is no tax deducted at source on benefits as they are taken, and for those who remain UK domiciled the IHT consequences following death are little or none at all.
If you have a UK pension fund and would like to utilise this asset for purchasing property, creating income early in retirement, passing assets to family members/beneficiaries, avoiding annuities and/or maximizing tax benefits on death, then QROPS offers a strong solution. That said; ensure you know that the solution meets your current and future objective. Seek professional help and then you should avoid coming a QROPper!
This article was compiled in conjunction with Stephen Ward, Managing Director of Premier Financial Solutions (UK) Ltd who work in conjunction with Pegasus to provide specialist, expert advice with regards to UK pensions and associated issues.