Lump sum flexibility
At present most UK pension schemes limit the lump sum which can be taken on retirement to 25%. 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, any additional payment from the original £100,000 transferred would be regarded as an unauthorised payment. The additional £20,000 growth would be subject to the local scheme rules.
After the ten year reporting period (5 year reporting periof 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 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.
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.
Effective for UK inheritance tax
QROPS are not subject to UK IHT 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.
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, benefits are paid as a lump sum or income tax free to the recipient beneficiary if the member was under the age of 75 at the point of death. if the client was over the age of 75 at death the recipient beneficiary would be taxed at their marginal rate.
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 net 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.
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 may prove difficult. 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 advisers and should be able to better meet the varying needs of clients. If they have a number of pension arrangements then it may be beneficial to consolidate these not only because of ease of record keeping but also because they could be paying multiple fixed administration costs.
QROPS can offer access to an extremely wide choice of investments. This could be particularly useful if the 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.
The area of pension planning has always been complex but by explaining the benefits to the client they will at least be able to better understand if this solution meets their needs. With an adviser knowledgeable and abreast of current pension developments, this provides the international client with choice and opportunity to take some control to ensure their pension arrangements fit with their current lifestyle choices.