David Goodall

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By David Goodall - Sun 26th Jan 2014

 

QROPS : Qualifying Recognised Overseas Pension Schemes

The Financial Conduct Authority (FCA) - which replaced the FSA in April 2013 - has made it mandatory that when UK advisers meet clients who have moved or intend to move abroad, they must be told about the option of QROPS, demonstrating how important this option has become.

QROPS have existed since 2006 but started to become part of overseas financial planning in early 2008. For such a recent innovation, there have been many changes along the way. Major adjustments made by the UK in April 2012, are now well established and the market more mature.

For most people, in the UK, their pension is their second biggest asset after their home. When they emigrate they have this important asset which needs careful administration and control. Tax preferences given lead HMRC controlling very closely how the funds can be used. The tax advantages include :

* Full tax relief, under maximum allowances, on all contributions

* Major tax advantages to the tax treatment of funds held in pension arrangements

* Under UK tax rules, 25% of the fund can be paid TAX FREE as a pension commencement lump sum

So whilst pension planholders regard it as ‘MY MONEY’ the tax authorities (HMRC) have a say in how it is distributed and taxed.

Once the individual emigrates, or plans to emigrate, the possibility of transferring to a QROPS becomes an option.

The principal advantages are :

*The fund will be free of UK Inheritance Tax

*In most situations, the income can be paid gross

* Income limits imposed by HMRC will cease after a qualifying period

* No requirement to buy an annuity : beneficial when interest rates are so low

* The funds within the pension fund can be invested more flexibly. In fact, some QROPS Trustees allow self investment similar to a SIPP

* Consolidation of disparate funds into one

* Taking income is no longer controlled within the scheme rules but is more flexible

Looking at Jurisdictions

There are many available and these need to be discussed with an authorised and regulated adviser. Each has their own benefits but matching YOUR needs is an IMPORTANT aspect of giving best advice. I have chosen 3 of the most popular jurisdictions to show some of the differences :

Malta has four distinct advantages when dealing with UK pension clients, especially those who become residents in Spain.

* Malta is an English speaking country

* A low cost economy

* An EU Member state

* Retirement income can be taken at age 50

Without question, Malta benefited most from the rules changes which became operative from 6th April 2012

Gibraltar has approved QROPS and this option is developing, quickly. Up to 30% pension commencement lump sum can be taken from age 55. Income is taxed at a flat rate tax of 2.5% and declared as income in your country of residence. There are a wide range of investments available and self investment is permitted.

New Zealand remains a viable and strong option for QROPS. Please note that since 6th April 2012 full encashment is not possible.

The principal benefits which New Zealand enjoys are :

* Tax Free Lump Sum is 30% of the Fund Value

* Flexible income arrangements, as long as the 70% available for income rule is maintained

* Tax Free investment portfolio which is ‘flexible’

Why not Spain ?

Spain is NOT a good jurisdiction for QROPS

Spain does not recognise a trust structure, which is necessary to accept a UK pension. Therefore any potential transfer to a QROPS by a Spanish resident would take assets currently in held in trust, out of trust, with negative taxation consequences.

It is much better for Spanish residents to have the capital sums outside Spain in a trust and then for any income to be taken and declared in Spain.

Non-UK Nationals

I am aware that people of many nationalities have, from working in the UK, preserved benefits. Good news – you do not have to take benefits when the scheme says so. You may also be entitled to a UK pension transfer to QROPS.

Advice

The best advisers will compare all jurisdictions before making a recommendation. The determining of your priorities should be the overriding reason for recommending a particular QROPS. Some advisers only deal with one provider in one jurisdiction.

Qualifying Recognised Overseas Pension Schemes (QROPS) are for professional advisers and their clients and hopefully the unqualified, unregulated imitators will disappear.

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