qrops - key benefits

Qualifying Recognised Overseas

Pension Schemes (QROPS)

Top 20 Benefits of Transferring

your UK pension Scheme

w w w . m y q r o p s . d i r e c t

Top 20 Benefits of a QROPS / myQROPS Direct / May 2015

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Since their introduction by HMRC in 2006, QROPS (Qualifying Recognised Overseas Pension Schemes)

have experienced a year-on-year increase in popularity. In the most basic terms, QROPS enables

individuals to benefit from increased flexibility, greater control over their pension(s) and taxation relief.

However, for anyone who has UK pension entitlements and is considering transferring their scheme(s)

into a QROPS, it is important to consider the full range of benefits on offer, as well as how the recent

‘Pension Flexibility 2015’ changes have impacted these benefits.

1. Up to 30% Tax Free Lump Sums Compared with 25% in the UK When you start drawing benefits from a UK Pension scheme, no more than 25% can be taken

immediately as a tax free lump. This is provided certain limits are not exceeded i.e. total pensions are

not larger than the lifetime allowance (LTA) currently £1,250,000 (falling to £1,000,000 from April 6th

2016).

2. Income Taxed in Country of Residence UK pensions are generally paid out net of basic-rate income tax. With a QROPS, clients can transfer to a

jurisdiction which pays out gross income automatically, and charges little or no income tax on their

pension benefits so they only pay the tax, if any, applicable in their country of residence.

3. No 45% UK Inheritance Tax Charged on Death For UK pensions, so long as an individual is aged below 75 and pensions do not exceed the LTA, their

pension on death can be passed on to a nominated beneficiary as a tax free lump sum. However, after

the age of 75, pension benefits are subject to a 45% tax charge if paid as a lump sum to a beneficiary.

With a QROPS, regardless of whether the member has started taking benefits or not, the pension sum

may be passed onto the beneficiaries without UK IHT being imposed, providing they have been non-

resident for at least 5 complete tax years.

The new rules, which apply to death benefits paid out after April 6th 2015 irrespective of the date of

death, greatly alter the death benefits on UK pensions.

4. Exchange Rate Risk As long as pension benefits remain in a UK scheme, income from the scheme will be paid out to the

member in GBP. Therefore, for any member residing outside of the UK, their pension income is directly

subject to exchange rate risk.

In transferring pension entitlements into a QROPS, the member may determine in which of the major

currencies they wish to hold their pension scheme, with the option of also holding the pension in multiple

currencies. This allows for diversification of the exchange rate risk on pension income, or simply the

ability to align the pension income with the currency in the member’s country or residence.

5. Benefit from Worldwide Investment Options A QROPS can access a huge range of investment funds across a multitude of differing currencies and

jurisdictions, particularly when managed via an investment platform. This provides diversity and the

opportunity to tailor an investment portfolio to an individual’s specific needs.

A QROPS can potentially be used to hold commercial property as well, however careful consideration

must be taken due to the withholding tax applicable to UK property when held in this manner.

6. Consolidation Bringing all of your historic UK pensions under one roof makes the administration and investment

management considerably more straight-forward. This increases the ease of monitoring and making

strategic alterations to your pension fund, in order to benefit from opportunities and respond to any

potential market downturns.

For those who prefer to take a more balanced approach, splitting your pension assets between a QROPS

and a UK based pension, offers the benefit of a hedge between strategies.


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7. Testing Against the Falling Lifetime Allowance Now The LTA has reduced in real terms ever since 2010/11 when the UK government saw it as a means of

raising funds through this additional tax. The LTA limit has fallen from its high at £1,800,000 in 2010,

to the low of £1,000,000 set to come into force from April 2016.

If an individual’s pension entitlements exceed the LTA, the excess is taxed at 55% if taken as a lump

sum or 25% if taken as regular pension income, although there is still UK income tax to be applied on

top of this.

This means that anyone with total pension entitlements exceeding the LTA, is going to be taxed

extremely heavily.

When a UK Pension Scheme is transferred to a QROPS its value is tested against the LTA at that point.

As the pension has been tested against the LTA at that stage, any future growth is then outside of the

scope of the LTA. Recent experience suggests that it is difficult to predict where the Government will

stop when it comes to lowering the LTA, and therefore it may well make sense for someone to consider

a transfer to a QROPS now, before this limit reduces further. This is particularly relevant over the next

12 months whilst there is the opportunity to test your pension benefits against the LTA of £1,250,000

rather than £1,000,000. Any transfer to a QROPS which exceeds the LTA triggers a tax charge of 25%

irrespective of how the benefits are later taken i.e. as a lump sum or income, so there is still the potential

to benefit significantly, regardless of whether the LTA continues to reduce or not.

8. Final Salary Funding Levels and the Strength of the PPF The promise to pay a future income is only as strong as the pension scheme and the company who

ultimately underpin that promise. There is a Pension Protection Fund (PPF) in place to guarantee pension

entitlements in the event that the employer scheme becomes insolvent, the likelihood of which continues

to increase as the majority of UK pension schemes are currently in deficit.

It is extremely important however, to note that the PPF will only guarantee 90% of any pension

entitlements, and more notably, a maximum of £32,761.07 per annum. As a result, individuals with

larger pension schemes could lose-out significantly as a result of this cap on guaranteed entitlements.

9. Portability, Flexibility UK pensions are understandably structured around UK residents, so for an expat who has no intention

of returning to the UK, they should always consider the benefits that a QROPS may bring.

QROPS are a great way to manage pension assets that have been built up throughout your life. With all

the other points in mind, considering the additional benefit of the administrative efficiency a QROPS can

bring really does make QROPS a compelling option.

QROPS have been designed and built in the 21st century for the expat/non-resident community

specifically in mind. This means they are portable and can be used to provide retirement benefits

wherever you reside.

10. Maximising a Spouses Pension Pension provision for a spouse on the death of a member is often in the forefront of a member’s mind.

On the death of a member who has begun receiving their final salary pension, it is the norm for the

spouse to continue to receive an income but at a significantly reduced level, typically 50%.

With a QROPS, 100% of the pension fund can be used to provide an income for the spouse upon the

death of the member. Many people may wish to consider transferring to a QROPS to ensure the pension

asset is able to provide a more substantial retirement income for their spouse, should the worst happen.

11. Only 90% of the Pension Income from a QROPS is Taxable (on a return to the UK) Pension income paid under a QROPS to a UK resident is classed as a Foreign Pension, which is taxable

in the UK on 90% of the amount arising, or as relevant foreign income if the remittance basis is being

claimed.


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12. Maximising Final Salary Schemes A defined benefit, better known as a final salary scheme, is the most generous and secure type of pension

arrangement available. The generosity of these schemes have meant most have been forced to close,

restrict access or reduce benefits because they are so expensive for the employer to provide and operate.

Those that are fortunate to have been members during their life should certainly think carefully before

considering a transfer away.

This being said, there are a number of circumstances which may warrant the consideration of such. The

main reasons to consider a possible transfer to a QROPS could include:

The expense to the scheme means the future ability to provide benefits has been jeopardised. If

the pension scheme collapses and the employer becomes insolvent, the UK Pension Protection Fund

(PPF) may honour the benefits so long as the PPF can itself take on the burden. The PPF is not

Government backed though but by a levy on other similar pension schemes.

Even if the PPF steps in, you must be aware that only 90% of your benefit will be protected with a

cap of £32,761 per annum. Therefore, individuals with larger pensions are likely to be impacted

heavily by this.

You have a large pension and passing on as much wealth to your beneficiaries is a priority for you.

The death benefits available are dependent on whether you are a deferred or active member of a

final salary scheme.

If you are a deferred member and don’t have a spouse or dependant (child under 23) then your

pension income will die with you. Transferring to a QROPS will allow you to pass on a lump sum

death benefit to a beneficiary of your choosing.

13. Early Retirement Since the 5th April 2010, members of UK pension schemes have been restricted to being able to draw

benefits from the age of 55. The minimum age has increased from 50, however there continues to be a

number of jurisdictions which have retained the old pension age of 50.

As a result of this, it is possible for a pension member to transfer their UK Pension assets to a QROPS,

which resides in a jurisdiction which has retained a retirement age of 50, in order to benefit from an

earlier retirement. It is worth noting that this is only possible after the member has been a non-resident

for 5 complete tax years.

14. Stability and Control A Pension is often an individual’s largest asset which means that if it is left unattended in a UK Pension

arrangement, the likelihood is it may not receive the required ongoing management and oversight. This

can be detrimental when you consider the following:

Ongoing alterations to UK Pensions legislation which may impact on your retirement funds;

particularly the reduction of lifetime allowance and the increasing retirement age.

If you hold a UK SIPP, Personal or Group Pension Plan where is the money invested? This is crucial

to whether the pension grows, keeps pace with inflation or at worst falls in value.

Transferring your pensions to a QROPS will bring your assets under an umbrella from which it can be

actively monitored and managed.

15. Pension Income Tax Planning The income payable from a UK pension is fully taxable as income, and is therefore taxable at a member’s

highest marginal rate of up to 45%.

A QROPS has the ability to turn the income withdrawn on and off between limits of 0 – 150% of GAD

(Government Actuary Department rates) each year. For an Internationally mobile individual, a QROPS

can provide the flexibility to draw income whenever they choose, which can enable them to be shrewd

and protect their pension against the tax man by maximising what they draw when in preferable tax

jurisdictions.


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16. Clean Break for UK Inheritance Tax (IHT) Individuals with large estates may often wish to lose their Domicile of Origin, and gain a Domicile of

Choice. This may enable them to avoid paying UK IHT on their non UK assets. It is however very difficult

to lose a Domicile of Origin.

Those who do gain, or are attempting to gain, a Domicile of Choice will almost invariably be advised to

cut all ties with the UK, moving all assets to the country of their new Domicile. This will mean moving

everything including business assets, home, will, family and even their place of rest.

Holding a UK Pension is yet another UK based asset, which means by transferring to a QROPS you are

able to break another tie, adding more weight to the argument.

17. Early Retirement from a Final Salary Scheme A Final Salary Scheme will often have quite punitive early retirement penalties for those who wish to

draw their pension prior to the ‘Normal Retirement Age’ set under the scheme.

Typically a scheme may impose a penalty, known as an actuarial reduction, of 0.5% per month. This

means if you retire 12 months early the penalty is a 6% reduction in your annual pension income.

If you retire 5 years early the penalty increases to 30% of your annual pension.

As a result of these reductions, the retirement income achievable through a QROPS may surpass that of

the Final Salary scheme.

18. Breaking Away from UK Pension Legislation In recent years the UK Government have been introducing restrictions on an individual’s ability to shelter

tax through the use of pensions. This has been through the reduction in the annual amount that can be

contributed to pensions obtaining significant tax reliefs.

The annual allowance has seen a fall from £255,000 per annum in 2010/11 to £40,000 in 2014/15.

We have also been introduced to a new term for Tax Free Cash (TFC), now termed a Pension

Commencement Lump Sum (PCLS). This may lead the way in the future for ‘PCLS’ being taxable,

although it already has become taxable in part, in the event that a pension member exceeds the LTA.

The LTA is another allowance which is has seen a fall in recent years as illustrated in point 7 above.

All these factors are clear indicators that the UK Government is trying to limit the tax efficiency of

pensions in its bid to deal with the UK deficit. This makes for an additional reason to move away from

the UK Pension regime by transferring to a QROPS.

19. Protection against Creditors in the Event of Bankruptcy If you legitimately made pension contributions to an individual pension arrangement and later became

bankrupt, then the Courts will find it difficult to retrospectively reverse the contribution made, to pay

creditors.

When benefits finally commence from the pension arrangement you may be ordered to pay these to

creditors. In transferring UK pension assets to a QROPS it makes it far more difficult for UK courts to

take action.

20. A Home for Divorce Settlements In the event of a divorce, a court may put in place a pension sharing order on any UK pension

entitlements. QROPS are outside of the earmarking or pension sharing jurisdiction of the UK courts due

to their lack of jurisdictional power outside of the UK.

Transferring UK Pension assets to a QROPS may be seen by some as a step in protecting assets from a

spouse on divorce. Quite apart from both the moral and ethical grounds for considering this, protection

of assets from a spouse could be seen as a by-product of a QROPS transfer, rather than an outright

reason for transferring the pension.

qrops - key benefits

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