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QROPS!
Anyone reading the international expatriate press in recent months may
will have come across a curious 5 letter acronym – QROPS. What is it and
why should it be considered by anyone who has left the UK for foreign
climes? This article attempts to explain QROPS and perhaps along the way
may debunk some of the myths and misleading information that has been
published.
On moving abroad many British expatriates will have left their UK pension
rights retained in their existing arrangements. These private pensions
remain subject to UK pensions law with the effective requirement to
purchase an annuity at a later stage (and in any case no later than
attaining 75 years of age without the later prospect of huge tax charges
otherwise). Additionally UK taxation may be suffered on pension payments.
Annuity rates are at historic lows and of course this has been exacerbated
this year following the turmoil experienced in the international stock
markets, reducing the investment performance of underlying funds. The
second negative aspect of annuities of course is that in the event of the
death of the pensionholder, any remaining value in the pension fund is
lost for all time.
Under UK legislation introduced in 2004, effective from April 2006,
expatriates or UK residents who have a demonstrable intention to move
overseas may transfer the value of their UK pension rights to a non-UK
pension scheme. In doing this, it is possible to avoid most of the normal
restrictions imposed on the pension fund if it remained in the UK. The
transfer must be made to a Qualifying Recognised Overseas Pension Scheme
(QROPS for short) that is approved by HM Revenue & Customs (HMRC).
Such non-UK schemes may be established in many jurisdictions across the
world. Amongst others, Gibraltar, Guernsey and Isle of Man are all
considered suitable and of course as British territories, clients may rest
assured that their affairs are being well looked after in any of these
well regulated jurisdictions.
There are a number of basic conditions that must be fulfilled in order for
a transfer to a non-UK pension scheme to be considered advisable. Cases
should be examined on an individual basis but the basic rules are:
The pension holder must become non-resident of the UK and remain so for at
least five complete UK tax years.
The existing UK pension scheme can be in drawdown (i.e. benefit is being
paid from the fund directly – an approach now referred to as “unsecured
income”) before transferring to a QROPS. However, there are restrictions
and if the permitted lump sum (nearly always 25% of the value of the
pension rights) has been taken, no further lump sums are allowed.
UK rules impose a statutory lifetime allowance relating to the amount
payable from UK registered pension schemes that will be treated as
tax-privileged. For the tax year 2008/9 this allowance is £1.65m and will
rise in stages to £1.8m by 2010/11. Transferring benefits to a QROPS is
known as a crystallization event and the value of pension rights
transferred in excess of the lifetime allowance will be taxed at the rate
of 25%.
QROPS can be established so that the underlying investments are not
subject to tax. With careful
on-going planning, the pension fund can be continued until retirement date
on a tax free basis.
As mentioned above, the other principal benefit in transferring a UK
Pension to QROPS is that the UK requirement to purchase an annuity in
later life is avoided. The pension fund can therefore be used by the
member for his lifetime and any remaining balance can be passed on to
their heirs upon the members death.
In order for the pension to qualify for QROPS status, the overseas plan
must be regulated in its
home territory and HMRC will require confirmation that this is so before
recognising the plan.
Individuals who are seeking advice when considering in their own pension
arrangements have
literally dozens of options available to them. As always in financial
services, not all QROPS are
the same and the advice received may also vary, so here are some general
comments on what to
look for when taking advice?
First of all, check that the non-UK pension option you are considering is
indeed recognised as a
QROPS by the UK revenue authorities. Although it is not obligatory,
recognised schemes may
choose the option as to whether that particular scheme is listed on HMRC’s
own website. This is a good place to start for obviously to be a QROPS in
the first place, HMRC will have subjected the international scheme to a
rigorous background check.
Secondly, check whether the advisers you are considering using are
actively promoting in-house
investment funds for the underlying pension, or will you be allowed the
freedom to elect your own investment adviser. As long as the adviser is
regulated and you are happy with the performance and fees, this may not be
a critical issue for you. But it becomes important when comparing fees as
some plans may charge less for the QROPS itself but force you to invest in
a restricted list of funds - caveat emptor (let the buyer beware) indeed.
We believe that it is also important that when transferring to a QROPS,
the fact this this is a pension designed to provide retirement income
should be considered paramount. Whilst not perhaps against the UK rules as
they are currently written, the UK revenue authorities take a dim view of
“cashing in” – that is using the transfer to a QROPS simply as a way of
encashing the pension proceeds and using the released cash for current
expenditure – e.g. perhaps to buy a yacht. This was not the intention when
the UK government legislated for such transfers to non-UK schemes and it
is possible that in the future this will be formally forbidden. The
advantages of transferring to a non-UK scheme have been set out elsewhere
in this article but using this option to immediately close the pension
should not be considered. As always, professional advice at the outset
should be obtained to determine individual options that will depend on
current residency, family circumstances, state of health etc.
Be realistic on timing. Once the relevant information has been obtained
from the current UK pension holder, the administrators of the
international plan will normally require a 6-12 week period to complete
the transfer to the new arrangement. This timescale will depend on the
existing UK pension provider and your new pension administrator will
normally be responsible for liaising with that provider at all times and
any necessary costs should be agreed with the individual member in
advance.
An independent pension review is normally recommended taking account of an
individual’s own own circumstances before transferring their UK pension
rights to a QROPS. However this is not a legal requirement and can be
waived by the member although care should be taken at all times if this is
being considered.
Finally, it should be noted that a subsequent withdrawal from a QROPS is
normally allowed but questions of how this can be arranged and any likely
withdrawal costs should also be determined at the outset. Once again this
will depend on individual circumstances
Sovereign - Consultoria Lda.
Parque Empresarial Algarve, Lote 8, Porta 21
8400-431 Lagoa
Portugal
Tel: +351 282 340 480 Fax: +351 282 342 259
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