by John Westwood [email protected]
John Westwood is the Managing Director of Blacktower Financial Management Group.
This article explains the benefits of investing into a Qualifying Recognised Overseas Pension Scheme (QROPS).
The Conservative Liberal coalition’s first UK budget was positioned as “tough but fair” with some small surprises as Capital Gains Tax was immediately increased to 28 per cent for higher rate tax payers , trustees and personal representatives. A change was widely anticipated but pre-budget speculation had been that this would return to 40 per cent.
However a surprise change, and an area of interest for UK and international clients with UK pension money, was the Government statement that ‘it will end the existing rules that create an effective obligation to purchase an annuity by age 75 from April 2011 to enable individuals to make more flexible use of their pension savings’.
This increase in the age by which the pension member must secure an income has effect from June 22, 2010 and will only apply to individuals, who have not yet reached age 75 before June 22, 2010.
This change will also apply for inheritance tax (IHT) purposes to those individuals if they die on or after that date and before age 77.
This change has led to some commentators speculating that this is the end of QROPS.
Interestingly, our own research has concluded that the main reasons for recommending QROPS to a client is the removal of currency risk, greater lump sum possibilities and the IHT benefits.
With a rise in the number of UK pension transfers to overseas pension solutions expected to continue, it is essential that a close eye be kept on the UK pension changes.
This ensures you have up to date information before making any decisions regarding transferring pension schemes.
However, while the pre-March 2010 budget requirement to purchase an annuity by age 75, or use Alternative Secured Pension with the potential penal inheritance tax consequences this would create, have been cited as possible reasons why you should consider a QROPS, there are many more reasons why a transfer may be appropriate for the right client.
If we first consider who a typical QROPS investor might be, they will generally fall into one of three categories:
• a UK expatriate
• someone with definite plans to leave the UK, or
• a temporary UK resident.
The technical detail behind QROPS may appear to be complicated, however the benefits are clear and are summarised below.
Lump sum flexibility
At present most UK pension schemes limit the lump sum which can be taken on retirement to 25 per cent. Under QROPS the same rules that apply to UK registered pension schemes will apply to the QROPS regarding the transferred fund.
After a five year reporting period 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 per cent of the transferred amount is used to provide an income.
Income flexibility
Income options are similar to those which apply to some UK pensions before you reach age75 (77 following the Emergency Budget). 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.
Generation planning
The QROPS fund remaining upon the member’s death, even if you have been receiving a income, is all available to be passed on to your loved ones.
Reduced Inheritance Tax
QROPS are not subject to UK IHT upon the member’s death, although some jurisdictions may apply a form of tax. There may be some form of local inheritance tax to pay depending upon where you are domiciled at the time of death, but in all likelihood there is going to be a substantially larger fund to pass on to your beneficiaries.
More selection
We await the Government consultation document as to how it proposes to achieve its stated aim for clients with invested pension funds approaching age 75. The detail of this is yet to be disclosed.
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 you may be required to draw a small amount of income.
Reduced income tax
UK pensions are paid out net of basic-rate tax. PAYE applies to all pensions from registered pension schemes. Claiming this back can be time consuming and a claim may not be successful, especially if there is no double taxation agreement in place with the country where you are resident.
With a QROPS, you can transfer to a country which charges little or no income tax on your pension benefits so you only pay the tax, if any, applicable in your country of residence.
Protection from currency fluctuations
Whether it is whilst you are saving for retirement or receiving pension payments, nearly all UK arrangements are denominated in sterling. With a QROPS you can not only invest in assets denominated in most currencies but also receive benefit payments in local currency and therefore eliminate any exchange rate risk and currency conversion charges.
Convenience
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 who should be able to better meet your varying needs.
If you 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 you could be paying multiple fixed administration costs.
Investment selection
QROPS can offer access to an extremely wide choice of investments. This could be particularly useful if you want to invest in assets which will more truly reflect the currency and inflation factors relating to where you plan to retire rather than UK biased choices.
Some examples could be offshore investment bonds or offshore mutual shares.
Conclusion
This area of pension planning has always been complex but by examining the benefits of a QROPS you will at least be able to better understand if this solution meets your 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.
‘This facility is not suitable for all expatriates, and we recommend that advice is sought before one makes any commitment. As an Independent Financial Adviser, Blacktower seeks to ensure that our clients receive the advice suitable for their specific circumstances.
Blacktower Financial Management Group – Telephone 289 355 685.
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