QROPS & QNUPS
QROPS – the reasons why
If you are a UK national living abroad and have an existing pension in the UK, QROPS is a vehicle you may want to consider utilising, as there are many advantages – these are outlined below.
A History of QROPS
On April 6th 2006, The UK underwent the biggest shake-up of the UK pension system – “pension simplification day” changed the way in which individuals needed to look at their retirement assets. Thus, QROPS (Qualified Recognised Overseas Pension Scheme) was born and for the international professional, this had far-reaching impact. From this day forward, individuals that held a UK-based pension scheme were entitled, provided they were no longer a UK resident, to move their assets into an HMRC approved QROPS.
Since 2006, HMRC have continually made additional requirements for providers to meet strict conditions in order to be approved. Over time, the amount of legitimate providers on offer has reduced, and we ensure that we use recognised providers that have a long history in the international pension services market.
Benefits of using a QROPS
If you are a non-resident of the UK with a frozen pension scheme in the UK a QROPS could offer a vast array of benefits. This list is not exhaustive, and we recommend a face to face discussion to enable us to explain how these benefits can affect you.
- Lump sum flexibility
At present most UK pension schemes limit the lump sum which can be taken on retirement to 25% of the pension fund value, however this can increase to 30% with a QROPS as long as 70% is retained in the fund in order to provide a retirement income.
Under QROPS the same rules that apply to UK registered pension schemes will apply to the QROPS regarding the transferred fund. For example if £100,000 was transferred and this has grown to £120,000, the lump sum that can be taken is 25% of the transferred funds i.e. £25,000. The additional £20,000 growth would be subject to the local scheme rules.
After the 10 year reporting period (5 year reporting period before 6 April 2013) then the UK payment rules no longer apply, but the QROPS provider will still need to ensure that their QROPS status is maintained. Therefore, for some QROPS jurisdictions they will need to ensure that at least 70% of the transferred amount is used to provide an income.
This potentially leaves the remainder available as a lump sum but may be restricted by the local pension rules in the QROPS jurisdiction.
- Income flexibility
Income options are similar to those which apply to some UK pensions in that they can draw down an income. The maximum and minimum amounts are quite wide and based upon, among other things, life expectancy. The figures are designed with the aim of the fund being able to support an income until death, although investment performance will have a large impact upon this.
For non-UK pension holders in a Gibraltar or Malta QROPS, drawdown is provided on an actuarial basis, rather than calculated using GAD (UK government actuary’s department) annuity rates, thus maximising the available income during retirement.
- Generation planning
The QROPS fund remaining upon the member’s death, even if they have been receiving an income, is all available to be passed on to their loved ones, as long as they do not live in the UK.
- Effective for UK Inheritance tax
QROPS are not subject to UK inheritance tax upon the member’s death, although some jurisdictions may apply a form of tax. For example, there may be some form of local inheritance tax to pay depending upon where the client is domiciled at the time of their death. However, if the benefits are paid into a trust then the benefits would not be subject to the local inheritance taxes.
- No income tax charge on death
Regardless of whether the member has started taking benefits (on or after age 55) or not, there is no income tax charge imposed on the payment of a lump sum to the member’s dependants on the member’s death providing they are not UK resident. For UK pensions, all crystallised benefits (UK registered pensions in draw down) are subject to a 55% tax charge in these circumstances, therefore the QROPS is likely to provide a larger fund to pass on to their beneficiaries.
- Same selection
Compulsory purchase of an annuity at age 75 (77 since 22 June 2010) is no longer a requirement for members of UK registered pension schemes since the changes announced by the UK government on 9 December 2010. Individuals with money purchase pension funds who have yet to take benefits will now be able to defer the decision indefinitely. Fortunately, a QROPS has never had such annuitisation pressure and clients with a QROPS can generally remain invested as long as they wish although in some instances they may be required to draw a small amount of income.
- Reduced Income Tax
UK pensions are generally paid out after deduction of basic-rate tax. PAYE applies to all pensions from registered pension schemes. However, non-UK tax resident members can elect for payment to be paid out gross by completing the relevant HMRC form. 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. For example, in Gibraltar the income tax payable would be 2.5% – the lowest of any QROPS jurisdiction.
- Protection from currency fluctuations
Whether it is whilst they are saving for retirement or receiving their pension payments, nearly all UK arrangements are denominated in sterling. With a QROPS, clients can not only invest in assets denominated in most currencies but also receive benefit payments in their local currency and therefore eliminate any exchange rate risk and currency conversion charges.
UK pensions are understandably structured around UK residents. If clients plan to be, or are already, based overseas then obtaining specialist advice on UK pensions is very necessary – which is where Churchill & Partners can help. QROPS have the benefit of having been designed and built in the 21st century for a more transient population and as such are more familiar to international advisors like us, and we can therefore provide the most suitable advice to better meet the varying needs of our clients. If a client has a number of pension arrangements in place then it may be beneficial to consolidate these, not only because of ease of record keeping but also to avoid paying multiple fixed administration costs.
- Investment selection
QROPS can offer access to an extremely wide choice of investments and gives a broader range of options than an onshore pension, including managed and self-managed investments. This could be particularly useful if a client wants to invest in assets which will more truly reflect the currency and inflation factors relating to where they plan to retire rather than UK biased choices. Some examples could be offshore investment bonds or offshore mutual shares.
- Reduction in other life costs
A standard pension in the UK that purchases an annuity will normally have a spouse payment built into the scheme, which will entitle the spouse of the pension holder to receive a reduced pension – normally somewhere between 30% and 50% of the actual benefit. This can obviously cause stress to the surviving party, especially if the death of the pension holder is unexpected and early on in retirement. As 100% of a QROPS is inherited by the surviving spouse and/or dependants, this will eliminate the need for life insurance to be purchased and ensure that all the benefit of the proceeds is paid to the remaining family members, as long as they do not reside in the UK. If they do live in the UK then the asset would be subject to a 55% pension tax prior to payout.
Who is eligible for a QROPS?
Those who are eligible for a QROPS include:
- individuals with UK registered Pension Schemes including GMP (Guaranteed Minimum Pensions) or protected rights who have become non-resident, or intend to become non-resident in the near future
- individuals with a UK accrued pension scheme with a minimum balance of at least £20,000
How much will a QROPS cost?
Over the last 8 years the costs attached to transferring a pension scheme have continually reduced, as the list of providers has increased.
For a full quote on how much your QROPS transfer would cost, contact us and we can explain how this could work for you.
QNUPS has become market terminology used generally to describe an overseas pension scheme that meets the QNUPS regulations but is not a Qualifying Recognised Overseas Pension Scheme (QROPS).
A Qualifying Non-UK Pension Scheme (QNUPS) is not a product or a pension scheme but the name of the regulations that must be met in order for an overseas pension scheme to be exempt from UK inheritance tax (IHT). Overseas pension schemes that meet the definition of a QNUPS within the QNUPS Regulations – the Inheritance Tax (Qualifying Non-UK Pension Schemes) Regulations 2010 [SI 2010/0051] – will not be subject to UK IHT unless there is evidence of deliberate tax avoidance.
Inheritance Tax is an issue that concerns most British international professionals, as HMRC is entitled to claim inheritance tax on UK nationals’ assets for up to 19 years after leaving the UK. As the QROPS rules in the original Finance Act 2004 omitted to make any provision for IHT relief, QNUPS were created to allow pension schemes to fall outside of the UK’s inheritance tax rules and thereby shelter assets for families and beneficiaries.
You can put a wide range of assets into a QNUPS, including a property, however you cannot transfer an existing UK pension into it, although you can transfer a QROPS after the qualifying period (5 years).
Unlike QROPS schemes, QNUPS do not have to be located in jurisdictions that hold a Double Taxation Treaty with the UK. This results in the scheme not having to report any financial movements to HMRC, therefore not generating any potential taxable gains.
A huge benefit to the use of a QNUPS is that there is no upper limit on your contribution level, as you are not restricted by the UK’s maximum lifetime allowance. Whilst QROPS still have to work within the UK LTA levels, QNUPS have no limits. Also, a QNUPS does not have to be registered with HMRC, which means no reports have to be made regarding payments or benefits given to the holder.
If you are fortunate enough to generate excess income in retirement, a QNUPS can still accept payments, i.e. there is no reason why one should be forced to stop contributing to a pension plan just because of age. Although contributions do not qualify for tax relief, they do not need to be justified by earnings – especially useful for high earners who want to top up their retirement fund. This also allows an individual to directly reduce assets that are subject to inheritance tax.
With the government changing the levels of Capital Gains Tax on higher rate tax payers, QNUPS can offer a solution. The assets in a QNUPS can grow free from Capital Gains Tax, which means your beneficiaries will receive the entire capital growth of your QNUPS assets in full.
For further information on Churchill and Partners QNUPS schemes, please contact firstname.lastname@example.org, or call us on any of the phone numbers shown on this website.