UK Pensions and QROPS facts
The Government published regulations on 21 March 2012 that changed the QROPS tax rules with effect from 6 April 2012. The regulations can be found at www.legislation.gov.uk/uksi/2012/884/contents/made
The changes that have taken place are impacting how we continue to go about providing our clients with advice on the best course of action to take in regards to any UK based pension funds. I decided to allow the ‘dust to settle’ as it were, and allow time for experts and advisers to make comment. However, after reading recent opinions in the press, I am certain that more than one of you must now be confused. So allow me to provide you with the ‘facts’ and nothing but the facts…
HMRC had 2 main concerns which led to the changes in legislation in April 2012.
1. 100% commutation (people fully encashing their pension funds)
2. Members avoiding paying tax when taking benefits (people not declaring their pension income in their new country of residence)
Only a few changes have been made, but to clarify some of the issues surrounding the current pension rules relating to your UK pension and QROPS:
1. 70/30 rule (70% income and max of 30% as a pension commencement lump sum). Any pension provider who wishes to be listed with HMRC as a QROPS must abide by these rules (including New Zealand). QROPS can still be established in New Zealand, but ANY pension provider in New Zealand that is listed on the HMRC list must abide by these rules.
2. Member Payment Charge – Any future payment from the overseas scheme which is a type of payment which would not have been authorised from a UK registered scheme will potentially give rise to a member payment charge under Schedule 34 Finance Act 2004 on a resident or recently resident individual. UK tax charges can still apply even after you have transferred your pension to a QROPS. The general rule is that UK tax charges will continue to apply in respect of payments you receive from the QROPS so long as you remain in the UK and for up to 5 tax years after the tax year in which you leave the UK. Any payments outside of the 70/30 rule will be considered as unauthorised payments and are subject to tax charges (40% unauthorised payment charge plus 15% unauthorised payment surcharge – a total of 55%).
3. Ex pats in Spain – it is important to remember that the 25% pension commencement lump sum (commonly referred to as the 25% tax free lump sum) available to you as a UK tax resident, is NOT tax free if you are resident in Spain. The lump sum from a UK pension is taxed as follows: Lump sum minus 40%, the remaining 60% is taxed as income for that year in Spain.
4. UK pensions and the requirement to buy an annuity – The rules surrounding income drawdown in the UK changed with effect from 6 April 2011 and the following information is based on the new rules. Income drawdown allows you to keep your fund invested and not buy an annuity. You can have your pension commencement lump sum (maximum of 25% of the fund) and from the remaining fund you can take an income if you require to a maximum of the Government Actuaries Department (GAD) rates. On 9th December 2010 the Treasury announced a new retirement framework that saw the arrival of Capped and Flexible drawdown, replacing the previous USP (unsecured pension) and ASP (alternatively secured pension) both more commonly known as income drawdown. So you are no longer forced into an annuity purchase.
Andrea Speed Principal 21 May 2012
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