QROPS, what’s it all about? …
Have you worked in the UK before and paid into a pension? QROPS are a vehicle into which UK tax relieved pension funds can be transferred. It often results in more flexibility and options for the pension member. It can also lead to less tax both whilst alive and on death … if you want to know more read on…
The Financial Services Industry seems to thrive on jargon, so let’s first breakdown what the word QROPS actually means:
Q – qualifying
R – recognised
O – overseas
P – pension
S – scheme
So what does ‘qualifiying’ mean? …
The Overseas scheme must meet certain requirements set by HMRC and has agreed to HMRC reporting requirements concerning the payment of benefits to a member.
A QROPS has to report to HMRC about the payment of benefits for at least ten years from the date of transfer. However, once the member has been non-UK resident for five complete tax years, they may then benefit from options that are more attractive than those permitted under a UK scheme, as the rules of the jurisdiction where their pension is held come into force rather than HMRC rules.
What tax can I save by moving my pension to a QROPS? …
This depends on your personal situation, where you live, and how and at what age you choose to take the income/lump sums. It’s always better to talk to a qualified Pension Specialist to make sure that you are aware of all the pros and cons and how you may be able to save some tax.
As an example, let’s look at the situation for someone who dies before and after age 75 with a UK pension scheme:
Lump Sums from an individual pension: If the individual dies before age 75, the beneficiary will pay no tax on the funds. However, where the individual was over 75, the beneficiary will pay their marginal rate of Income Tax on the pension income/lump sum payment. This effectively creates a cliff edge at the age of 75 after which the tax-free benefits are lost. This is also the case for income from Lifetime Annuities.
NB. The situation is different again with a company pension scheme income. All pension benefits paid by defined benefit schemes are taxable as the recipient’s (beneficiary’s) pension income under PAYE no matter what age the member dies.
The difference with QROPS is there is no ‘cliff edge’ at age 75, the proceeds are usually paid gross in the event of death at any age irrespective of what type of scheme was transferred and it is up to the individual to ascertain whether there is any tax due in their own country of residence.
When drawing an income from a UK pension scheme the income is taxed under PAYE and so is automatically deducted. With a QROPS, depending on the jurisdiction, income payments are paid gross and it is up to the individual to report the income on their tax return in their country of residence.
It is also important to understand how the QROPS income should be reported in order to maximise the tax breaks available from this type of scheme.
Freedom to Leave your pension to whom you choose
One of the greatest benefits of QROPS is the ability to leave your pension pot to whom you choose on your death. This is also now an option with individual pensions in the UK, however, company pension schemes have very specific rules regarding who death benefits can be paid to, and if you are not married or in a civil partnership you are likely to find that your pension income will die with you, with no fund to pass on. In fact even if you are married, the scheme rules could and often do dictate that any spouses pension stops if your partner remarries after your death.
Also worth checking is that there is a spouses pension payable with your company pension scheme, as this is not always the case, particularly where a woman was the member many years ago.
If you are fortunate enough to have a sizeable pension fund you may need to give consideration to the Lifetime Allowance.
Any pension savings above the Lifetime Allowance will be liable for a tax on the excess called the Lifetime Allowance charge.
Working out if this applies to you
Every time a payout from your UK pension schemes starts, its value is compared against your remaining Lifetime Allowance to see if there is additional tax to pay. You can work out whether you are likely to be affected by adding up the expected value of your payouts. You work out the value of pensions differently depending on the type of scheme you are in:
For defined contribution pension schemes, including all personal pensions, the value of your benefits will be the value of your pension pot used to fund the pensions and any lump sum.
For defined benefit pension schemes, you calculate the total value by multiplying your expected annual pension by 20 (dependent upon when the income started).
Whenever you start taking benefits, a statement from your scheme should tell you how much of your Lifetime Allowance you are using up.
The way the charge applies depends on whether you receive the money from your pension as a lump sum or as part of regular retirement income.
Any amount over your Lifetime Allowance that you take as a lump sum is taxed at 55%. Your pension scheme administrator should deduct the tax and pay it over to HMRC, paying the balance to you.
Any amount over your Lifetime Allowance that you take as a regular retirement income – for instance by buying an annuity – attracts a Lifetime Allowance charge of 25%. This is on top of any tax payable on the income in the usual way. For example, suppose someone who pays tax at the higher rate had expected to get £1,000 a year as income but the 25% Lifetime Allowance Charge reduced this to £750 a year. After Income Tax at 40%, the person would be left with £450 a year. (Notice that this means the Lifetime Allowance charge and Income Tax combined have reduced the income by 55% – the same as the Lifetime Allowance charge had the benefits been taken as a lump sum instead of income.
NB. A final Lifetime Allowance check is completed when a pension fund is moved to a QROPS. No further lifetime allowance checks are made at any time after the transfer. Therefore, any growth received whilst the pension fund is held within your QROPS is not subject to a Lifetime Allowance Charge – EVER! This is actually one of the rare occasions where a QROPS may even be good advice for an individual who is UK resident and will remain UK resident.
Retirement planning encompasses much more than the provision of income through a pension. Advisers need to have a thorough understanding of their clients’ circumstances before giving advice on their retirement strategy. There may be a need for both income and capital in retirement. The health of the individual and life expectancy is also a consideration, together with the individuals tax status. Annuities ensure an income for life and new pension flexibilities mean that the question ‘how long will I live in retirement?’ is even more relevant.
How can I find out whether a QROPS is right for me?
You can usually do this using our service. If you would like to know more contact firstname.lastname@example.org
Speed Financial Solutions are a highly qualified financial services provider looking after clients throughout Spain and the UK. We provide a discreet and comprehensive service to individuals, and our service is tailored to suit your needs taking advantage of tactical opportunities as they arise in respect of your investment planning. We seek innovative solutions for our clients and employ our skills, based on many years of experience, to apply tax legislation to your advantage. Our relationships are built on trust and mutual respect. We are ready to answer your questions, giving you the confidence you want when dealing with a sensitive issue such as discussing your pensions, investments and savings.
Our Principal, Andrea Speed, is a Qualified Pension Transfer Specialist and a Fellow of the Personal Finance Society (PFS) which is the professional body for the financial planning community. The PFS is part of the Chartered Insurance Institute (CII), which is the world’s largest professional body for insurance and financial services in the world.
Fellowship is the highest qualification awarded by the CII and is universally regarded as the premier qualification. It is a major achievement in the financial industry and demonstrates the acquisition of skills and knowledge at the highest of levels.
Along with a Fellowship, Andrea is a CII Chartered Financial Planner specialising in Pensions, Investment, Taxation and Trusts.
Please take a look at our website – www.speedfinancialsolutions.com
For further information contact us on Tel 951 315 271 or 951 318 529
We are happy to discuss your own situation in more detail. One of our advisers would be pleased to spend some time with you either in your home or at our office to review your current savings, investments and pensions, so do call to make an appointment. Our Financial Review is completely free of charge and without obligation. Follow us on Facebook for regular updates.
The contents published are not recommendations or decision aids for your investment decisions and they do not constitute any type of advice. We are not tax advisers and independent tax advice should always be sought.
Andrea J Speed FPFS (DM), M.A.
Principal, Fellow and Chartered Financial Planner
Speed Financial Solutions
31 July 2019