By Des Cooney
For those eligible for a transfer to a Qualifying Recognised Overseas Pension Schemes (QROPS), there is a certain degree of flexibility in terms of how and when benefits can be taken. Below is an outline of the features of such schemes, along with an explanation of how they impact your retirement planning.
There are a number of advantages to be had in terms of taxation and investment by choosing a QROPS as your preferred retirement vehicle. Such advantages can be enjoyed in the following areas:
1. Lump Sum Benefits
In the UK, a tax free commencement lump sum of 25% can currently be taken from an individual’s fund upon crystallization of his/her pension. Current QROPS legislation allows you take up to 30% of your pension fund free from UK tax on retirement. However, it should be noted that certain countries may seek to tax such a distribution. For example, should you decide to take this lump sum while resident in France, you would be taxed at 7.5% under current legislation.
2. Provision of a Retirement Income
HM Revenue and Customs (HMRC) rules allow individuals to access 100% of their UK pension fund after the age of 55. However, it is not advisable to encash your pension in full, as this can result in higher taxes on monies withdrawn. It is often better to draw an income from the pension fund periodically in a tax efficient manner. The investment performance of funds within the pension portfolio will also play a significant role in this equation.
3. No Compulsory Annuity Purchase
Expatriates who transfer their pensions into a QROPS have no obligation to purchase an annuity. Individual’s therefore have the freedom to select funds that best suit their risk profile.
4. Reduction in Currency Risk
Retiring outside the UK on a sterling-based pension exposes your fund to unnecessary currency risk. QROPS solve this problem by allowing you to invest your pension, and take income and benefits in a currency of your choice.
5. Greater choice of investment options
Rather than being restricted to a limited range of funds offered by one particular insurance company, QROPS allows you to access funds managed by any of the world’s leading investment groups. This means you are able to create a portfolio which more accurately reflects your individual circumstances.
6. UK Inheritance Tax
Tax planning and pension planning go hand in hand. Assets held in a Qualifying Recognised Overseas Pension Scheme fall outside of your estate for UK Inheritance Tax purposes if you die while living overseas. Unlike a UK annuity, the full value of your pension fund passes to loved ones upon death. This means your wealth is protected for future generations.
It should be noted however that although QROPS are not subject to UK Inheritance Tax upon the demise of the member, other jurisdictions may apply some form of domestic taxation. Expatriates who are in possession of a QROPS in France, need to be aware that there are succession taxes levied upon death for French residents. It is important to take professional advice in order to address this issue.
7. No Lifetime Allowance Pension Cap
The maximum amount of pension savings an individual can build up over a lifetime that can benefit from tax relief currently stands at £1 million. Accumulated pension savings that are worth more than the Lifetime Allowance (LTA) will be subject to a tax charge of up to 55% on the excess if crystallized. For those who transfer their pensions to a QROPS whilst resident overseas, the LTA will no longer apply.