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Ethical QROPS
Until April 2006 it was extraordinarily difficult to legitimately move UK pension benefits, built up during a working lifetime, outside the UK. With the introduction of Qualifying Recognised Overseas Pensions Schemes (QROPS) the rules have changed. QROPS are offshore pension arrangements which meet the rules of the jurisdiction in which they are located and are authorised in that jurisdiction as pensions.
Innovation have branded QROPS as Ethical QROPS. There are many QROPS advisers in the marketplace who advise that taxes need not be paid in the overseas territory (see below) This constitutes tax evasion which is increasingly likely to lead to penalties, interest and, in extreme cases, deportation or imprisonment.
HM Revenue and Customs have put in place a pre-approved system whereby UK pension rights can be transferred outside the UK into a QROPS at the member’s request.
To obtain QROPS status, a QROPS provider must meet a number of HM Revenue and Customs’ rules relating to how and when benefits can be taken, together with reporting requirements for five complete tax years after the member has left the UK. Not all overseas pension schemes qualify as QROPS, and therefore, attempting to transfer into unauthorised schemes should be avoided at all costs. It is important to seek professional, qualified, and authorised advice.
In order to transfer UK pension rights into a QROPS, the member must have left or intend to leave the UK for tax purposes. In this case, UK pension rights can automatically be transferred outside of the UK into a QROPS in the same way as pensions can be transferred between approved providers within the UK. When benefits are properly transferred to a QROPS they do not suffer a UK tax charge.
Such a transfer may happen either before the member commences benefit or after payment has commenced. This includes most types of pension including income drawdown currently in payment and protected rights, which are pensions which have accrued as a result of UK national insurance rebates. However, it is not possible to transfer an entitlement to the basic UK state pension into QROPS, or to make a transfer after an annuity has been purchased or where Final Salary pensions are being paid.
Many QROPS impose some restrictions, to the extent that an individual must be resident in the country into which they are transferring their pension benefits. However, certain QROPS do not have this restriction and so there is no link between where the member lives and the geographical location of a QROPS. In this case the member is able to choose tax friendly jurisdictions that have more flexible rules for how benefits can be taken. Clearly, personal preference of location must be given due consideration.
A significant benefit for those who are not UK resident at the time they start drawing their pension benefits is that payments from QROPS will not suffer any UK tax. Their location of tax residence may have impact in terms of local taxes but with careful planning and specialist advice this can be minimised.
Fiscal nomads are people who have left the UK but are not established in a non-UK tax system. Such nomads may transfer their UK pension rights to a QROPS and in so doing remove the income stream from UK taxation. In addition individuals in this situation will also not be liable for tax in any other country. This could be important because once a UK resident pension comes into payment, the UK tax authorities will automatically tax the pension in the UK until the member establishes a new tax residency or moves the benefits offshore. For nomads, QROPS are very attractive. Do not however underestimate how disruptive the becoming of a fiscal nomad may be, not only in terms of reporting requirements, but also in terms of lifestyle and the potentially negative impact upon “enjoying” retirement. The real benefits of Ethical QROPS are set out below.
Once someone has been resident outside the UK for five complete tax years and has transferred their pension rights to a QROPS, the reporting requirements to HM Revenue and Customs cease. This means that, subject to the rules of each individual QROPS, more flexible ways of taking benefits can be introduced. The real benefits include –
- Never having to purchase an annuity;
- Being able to leave the remainder of your pension fund to your heirs upon your death;
- Having more flexibility in terms of how and when you draw down your benefits;
- Being able to plan more effectively in terms of how your benefits are taxed in the country in which you reside.
- Pension rights transferred into a QROPS are also now protected from UK inheritance tax (as introduced in the October Pre-Budget Statement).
By moving UK pension benefits to a QROPS, assets are effectively removed from the UK tax net and introduced to a new tax environment depending on the member’s new residence. For many expatriates, the avoidance of UK taxes on pension income and the dangers of additional pension tax levies are an important planning consideration.
Example: An individual with pension assets of £1.6m might take £0.4m of tax-free cash and then leave the UK to retire to Spain for example, living off the cash. After five tax years, they could draw the pension. If they had stayed in the UK, most of their income would be taxed at 40%. By using a QROPS they could increase their net pension by over 50%. i.e. For every £2 in the pension pot, Alistair Darling adds another £1.
For further information, please contact Martin Coombes or Rhys Llewellyn on 029 2066 0273.