QROPS Advice
QROPS Advice
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Legislation introduced in April 2006 gave the ability for a UK pension to be transfered to an overseas pension PROVIDING it meet certain qualifying rules. These rules were to ensure the overseas pension broadly followed the UK legislation. This obeyance to the UK rules was seen as a justification for having given UK tax relief on payments into the pension scheme in the first place.QROPS or Qualifying Recognised Overseas Pension schemes can give several benefits to the individual expat. For the first 5 years of the new pension the trustees of the new pension scheme have to report once a year to the UK Inland Revenue to confirm continuing qualification with the rules. After 5 years the reporting requirement falls away and if the pension is then moved there is no requiremen to report to the UK and no loss of UK tax relief. It is therefore possible to transfer your fund to another investment which does not require you to purchase an annuity.Why is not purchasing a pension annuity a good idea?A pension annuity means that you give your capital, the amount that you have built up in your pension less any tax free cash you are allowed to tax, to an annuity provider who will guarantee you a lifetime income (your pension), no matter how long you live. There are pros and cons to this. You know how much income you are going to get and you know you will get this for life. Unfortunately, the amount of interest you get reflects interest rates. The current low levels of interest rates have meant many people have had smaller pensions than they might have hoped for.The thing that people hate about annuitiesUnfortunately, when you buy an annuity your capital is gone for ever. This is the trade off for getting a lifetime income. It is why pensions are given tax relief because the State (applies to many countries, not just the UK) know that you cannot "squander" your hard earnt pension fund, you have to be given an income. This helps reduce your dependency on the State.Is this why QROPS are so popular?After 5 years of membership of the scheme it is possible to move your pension fund into an alternative investment where you do not have to buy an annuity. The example below shows why QROPS are so popular with people.UK Pension Post QROPSPension Fund 250,000€ 250,000€Annuity Purchase 250,000€ NilOn Death, amount left for family Nil 250,000€This is a very simplified example. There are many more factors to take into account yet it does show that it is possible to leave a significant legagcy to one's family with this option. It is also no coincidence that all the great families, be they British, Catalan or Spanish, take into account "family" financial planning to leave as much as possible to their heirs. This includes, unsurprisingly, many families of politicians!Careful QROPSThis is a specialist type of planning and should not be entered into lightly. Advice from a suitably qualified adviser is essential. You should also be aware that the take up of this type of planning has probably exceed the UK Revenue's expectations and therefore further changes and restrictions are possible in the near future to this type of planning. The withdrawal of all Singapore based schemes by the UK Revenue on 27th May 2008 is an example of possible change. As the original legislation contained some ambiguity, it may well be that the UK Revenue can effectively change the rules without needing to change the legislation.QROPS - The 5 Year Rule, A warningIn the legislation that introduced QROPS there were two qualifying conditions, both having a 5 year requirement. One requirement was for a person to be non UK resident for 5 years before they could make changes to the QROPS and either take the cash or move it to a non annuity requirement investment. The other requirement was for the trustees of a scheme to report to the UK Revenue for a period of 5 years during which time the scheme must stay as a qualifying scheme.We admit there is some ambiguity in the legislation. However, some people are using the 5 year non residency basis as the controlling rule. For example, someone who has been non resident for 4 years is entering a QROPS and taking the money out as cash after a further year, ie after 5 years non residency.Do not do this OR join any QROPS scheme that is doing this. IF, and again it is accepted that it is an IF, the ambiguity is decided in favor of the 5 year scheme reporting requirement (and not the 5 year non residency) the consequences for your pension are dire. You will suffer UK tax (even though you do not live in the UK any more) of between 40 to 55%. In the above example, on a pension fund of 250,000€ this will cost you up to 137,500€. Err on the side of caution and expect to have to keep your QROPS for at least 5 years from the date of entry.For more information on QROPS please click here
posted by Barry Davys IFA @ 6:47 pm
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