Tax: the main attraction

Getting a QROPS can offer you more choices and flexibility than you could ever dream of as a UK pension saver. However, it is probably tax that has reeled you in to getting one in the first place.

QROPS’ exemption from UK inheritance tax was confirmed this year, and is not to be sneezed at. But human nature dictates that we are more interested in savings to be made in this life rather than the next, so it is probably the income tax exemption that offers the biggest appeal.

As long as a QROPS saver resides outside of the United Kingdom for tax purposes for at least 5 years following their pension transfer, their pension assets will be tax free. It is true that the residence rules are now rather complicated, but as long as you do not fall foul of them, your pension’s tax exempt status is safe.

The 5 year period is also significant from the point of view of QROPS’ trustees reporting requirements. For the first 5 years following the pension transfer, the trustees must report back to HMRC with information about the kinds of investments that are being made, and withdrawals that you have taken. However, when that time has elapsed, HMRC no longer have an interest in the scheme.

Some QROPS investors are surprised to learn that their pension may attract tax in the country in which it is based, or in the country where they live, if different. This is exactly why investors should get advice from a financial professional with plenty of experience of dealing with QROPS. A competent adviser can select a few options from the QROPS list and give you an appraisal of the tax consequences that each option may present. Accordingly, if you are well advised, you will have a number of options to choose from, and will understand the tax implications of each.

Given that most financial centres have “budgets” at least once a year, it is also important to have an adviser whose finger is on the pulse regarding changes to tax rules and policies. After all, if a QROPS country suddenly starts imposing heavy taxes on pensions, you may wish to know about this as soon as possible so that you can move your pension elsewhere!

QROPS

It is estimated that around 400,000 Britons move abroad every year.  A recent research report from Scottish Widows showed that 2/3’s of higher rate tax payers are planning to sunnier climates when they retire. This figure is set to grow substantially when you take into account the proposed new tax rate increase as from 6 March 2010 from 40% to 50% for those individuals with income over £150,000.

Many individuals of non-UK origin come to work in the UK each year.  As part of their employment packages many of these people will become members of UK registered pension schemes and will have used such schemes to obtain tax relief against their UK sourced earnings.  Unfortunately even once they have left the UK, UK IHT can apply to non domiciles in respect of assets held in the UK at the time of death.  This is particularly important now that pension funds are no longer fully IHT protected.  In addition, should a scheme be liable to a member payment charge or other such sanction they cannot offset these ‘taxes’ against any tax assessment in their home country as treaty relief under a Double Taxation Treaty generally does not apply.

Qualifying Recognised Overseas Pension Scheme or QROPS for short allows for UK pensions to be transferred into them, in effect removing them from UK legislation. To find out more about QROPS and the full details and benefits that can apply, follow this link to another QROPS article.

It is important to check whether the country where the pension member lives has a double taxation treaty with the jurisdiction hosting the QROPS.  For example, although it is rumoured that there are plans to slash the tax rate to zero shortly, there is currently an 18% tax levied on benefits taken in the Isle of Man for non IOM residents. Obviously members will look to gain a credit in the country where they are living to offset this against their income tax liability. Without a double taxation treaty, however the member may pay the income tax twice.

QROPS Costs

QROPS can be more expensive than UK pension schemes.  One option is for expatriates to retain their UK pension scheme until they have lived outside the UK for more than five years.  Having said this, many schemes are now competitively priced with UK pension schemes.  Another important point here is that it may not necessarily be a good idea for members to leave their UK pension funds in the UK for the first five years after they leave the UK.  Members may want to transfer their pension overseas as soon as possible because of the potential risk that the UK government could change the rules, thus resulting in a missed opportunity.

QROPS Considerations

• Tax rules in the UK.
• Tax rules in the country where the scheme is based?
• Tax rules in the country of residence?

QROPS Benefits

Removes exposure to pension penalty charges that fall outside of Double Taxation Agreements.

Ability to receive a higher amount of tax free cash.  It should be remembered however that not all jurisdictions allow this.  The Isle of Man’s pension legislation allows for up to 30% tax free cash.

Benefits can be transferred elsewhere subject to tax office approval so other long term options exist.

QROPS can produce investment flexibility. Ireland based schemes for example, can hold residential property including that situated in the UK.  This does have to be done on a commercial and hands off basis however.

The ability not to take an annuity but also not to be forced into the unfavourable tax consequences associated with dying when taking an alternatively secured pension.  If you die when taking an alternatively secured pension there is the possibility of having up to 82% tax levied on the pension fund.  There is therefore the ability to undertake succession planning of pension assets.

Potential for investing with fewer investment restrictions.
Having non-UK sited pension assets makes it easier to achieve non UK domiciled status for IHT purposes.
No retirement to buy an annuity or purchase an alternatively secured pension.

Warning. Be aware of website and advisers claiming to offer Qrops advice. It is extremely important to only take advice from regulated companies and advisers. The HMRC clamp down hard on any unauthorised transfers. To make sure you are doing everything within the law, ask the company for their FSA regulations number.

Seeking QROPS advice can be laborious and confusing. There are a great deal of website offering QROPS advice, however many are created from non regulated companies that have terms of business with one provider that they try to push. To speak to a fully regulated advisory service that offers advice on all QROPS providers follow this link to find out more about QROPS