Qualifying Recognised Overseas Pension Schemes QROPS
QROPS have existed since 2006 but started to become part of overseas financial planning in early 2008. For such a recent innovation, there have been many changes along the way. Major adjustments made by the UK in April 2012 are now well established and the market more mature. We spoke with an independent advisor for more details.
David Goodall, who runs Financial Pages In Spain, gave us the following interesting information about QROPS and check out our related posts at the end.
For most people in the UK, their pension is their second biggest asset after their home. When they emigrate they have this important asset, which needs careful administration and control. Tax preferences given lead HMRC to control very closely how the funds can be used. The tax advantages include:
- Full tax relief, under maximum allowances, on all contributions
- Major tax advantages to the tax treatment of funds held in pension arrangements
- Under UK tax rules, 25% of the fund can be paid TAX FREE as a pension commencement lump sum
So whilst pension planholders regard it as ‘MY MONEY’ the tax authorities (HMRC) have a say in how it is distributed and taxed.
Once the individual emigrates, or plans to emigrate, the possibility of transferring to a QROPS becomes an option.
The principal advantages are;
- The fund will be free of UK Inheritance Tax
- In most situations, income can be paid gross
- Income limits imposed by HMRC will cease after a qualifying period
- No requirement to buy an annuity, which is especially beneficial when interest rates are so low
- The funds within the pension fund can be invested more flexibly. In fact, some QROPS Trustees allow self investment similar to a SIPP
- Consolidation of disparate funds into one
- Taking income is no longer controlled within the scheme rules but is more flexible
Looking at Different Jurisdictions
There are many available and these need to be discussed with an authorised and regulated adviser. Each has their own benefits but matching individual needs is an important aspect of giving best advice. As an example, here are three of the most popular jurisdictions to show some of the differences;
Malta has four distinct advantages when dealing with UK pension clients, especially those who become residents in Spain
- Malta is an English speaking country
- A low cost economy
- A member of the European Union
- Retirement income can be taken at age 50
Without question, Malta benefited most from the rules changes, which became operative from 6 April 2012
Gibraltar has approved QROPS and this option is developing quickly. Up to 30% pension commencement lump sum can be taken from age 55. Income is taxed at a flat rate tax of 2.5% and declared as income in your country of residence. There is a wide range of investments available and self-investment is permitted.
New Zealand remains a viable and strong option for QROPS. Please note that since 6 April 2012 full encashment is not possible.
The principal benefits that New Zealand permits are:
- Tax Free Lump Sum is 30% of the Fund Value
- Flexible income arrangements, as long as the 70% available for income rule is maintained
- Tax Free investment portfolio which is ‘flexible’
As always, individual circumstances will dictate, but flexibility is certainly a realistic jurisdiction to consider.
Why Not Spain?
Spain does not recognise a trust structure, which is necessary to accept a UK pension. Therefore any potential transfer to a QROPS by a Spanish resident would take assets currently in held in trust, out of trust, with negative taxation consequences.
It is much better for Spanish residents to have the capital sums outside Spain in a trust and then for any income to be taken and declared in Spain.
People of many nationalities have, from working in the UK, preserved benefits. Good news – you do not have to take benefits when the scheme says so. You may also be entitled to a UK pension transfer to QROPS.
The Financial Conduct Authority (FCA), which replaced the FSA in April 2013, has made it mandatory that when UK advisers meet clients who have moved or intend to move abroad, they must be told about the option of QROPS. This shows how important this option has become.
The best advisers will compare all jurisdictions before making a recommendation. The determining of your priorities should be the overriding reason for recommending a particular QROPS. Some advisers only deal with one provider in one jurisdiction. Qualifying Recognised Overseas Pension Schemes (QROPS) are for professional advisers and their clients and hopefully the unqualified, unregulated imitators will disappear.