Back in April 2006 it was announced that individuals with UK pensions who are non-resident, or who will become non-resident in the UK for tax purposes, can transfer their pensions to a QROPS. Consequently any individual thinking of moving abroad or who is already non-resident would need to consider these schemes.
Since their introduction nearly four years ago, some 7,500 people have transferred their UK pensions to a QROPS with assets under management approaching £500 million. These amounts are relatively small, considering the value of UK pension funds as a whole, but as more people move abroad and become aware of the potential advantages, this trickle could soon become a flood.
Legislative Background
QROPS are schemes recognised by the UK tax authorities as the equivalent of an overseas pension and they have substantial benefits. QROPS can accept transfers from UK registered pension schemes, providing retirement flexibility and superior benefits on death as compared to UK tax schemes. QROPS have also become popular because of the tax advantages, simplicity and the increased investment flexibility. Other key benefits are the removal of a requirement to purchase an annuity and the potential freedom from inheritance tax. (Individuals can pass on their pension fund to dependents.) Many of these advantages are simply not available with a UK pension scheme.
It is very important to follow the guidelines as established by HMRC when selecting a QROPS provider. If a scheme is deemed to have been breaking HMRC rules, then any transfer made to that scheme could give rise to an unauthorised charge of some 55% of the pension fund.
There are many jurisdictions with approved QROPS that provide individuals with the ability to transfer UK pensions to the jurisdiction in which they have become resident. To become a recognised QROPS, the provider must meet the requirements set out by HMRC. A reporting requirement to HMRC remains for five years after the QROPS member has ceased to be resident in the UK.
Benefits
- There is a wide selection of investment options available, compared to UK pensions, with the ability to purchase onshore and offshore funds and fixed deposit accounts.
- Up to 25% can be taken as a lump sum free of tax.
- Individuals on retirement are not forced into buying an annuity and funds can be left for chosen beneficiaries without UK tax even after age 75. This is not possible with UK pensions.
- Income and benefits can be taken in a wide choice of currencies.
- Potential inheritance tax (IHT) planning and savings.
Tax
- Once transferred to a QROPS, generally there are no UK taxes applying.
- UK tax will only be paid if the recipient is resident in the UK for any tax year in which a distribution is made.
- Tax may be payable on distributions in the country of residence.
- Funds held in the scheme are not subject to any UK tax, allowing investments to grow tax free.
- Subject to the jurisdiction of the QROPS provider, tax is not deducted at source from pension payments.
Practicalities
Prior to transferring any UK pensions, new schemes should be reviewed to ensure that there are no penalties, no guaranteed annuity rates or any other matters that may make a transfer inappropriate.
The cost of establishing a QROPS can vary widely between scheme providers, asset size and complexity of transfer. Therefore, these matters should be thoroughly investigated.
If you would like to discuss whether QROPS may be suitable for your circumstances, please speak to your contact partner or contact Neville Pereira at LFFS on nevillepereira@lffs.co.uk or 020 7490 7766.
This article is based on our understanding of HMRC law and practice as at June 2010 which may be subject to change.
Lubbock Fine Financial Solutions is an appointed representative of City Gate Money Managers Limited which is authorised and regulated by the Financial Services Authority.