Qualifying Non-UK Pension Schemes (QNUPS) are useful for UK expats to plan for future inheritance tax liabilities and provide additional retirement income. This article focuses on QNUPS and estate planning.
Most QNUPS are based in offshore territories such as Malta, Guernsey and the Isle of Man. Many UK residents invest in QNUPS when they are at the point where standard UK pensions are less effective as a way of saving for retirement. Although the annual allowance was recently raised to £60,000 and the Lifetime Allowance (LTA) was scrapped, the new UK government have indicated that they will reinstate the LTA and may also review the inheritance tax rules on pensions.
One of the reasons they might change the inheritance tax rules is that it’s suspected that wealthy individuals only withdraw minimal amounts from their pensions to protect their estate from inheritance tax (IHT). Pensions aren’t liable for IHT, although there are potential tax consequences for beneficiaries depending on the age at which death occurs. In any case, pension pots worth in excess of the LTA will be subject to tax at some point.
QNUPS fall outside of both IHT and standard pension taxation. As a result, they are a useful tax planning tool for anyone who wants to reduce IHT liabilities and tax consequences levied on beneficiaries.
Conditions attached to QNUPS enable them to qualify for favourable tax treatment.
At the outset, the plan must be set up primarily to provide pension income. This means an actuarial illustration must accompany an application for UK residents. This illustration is a forecast based on investment growth and expected future income drawdown. The calculations must be revisited every three years for UK residents to ensure everything is on track.
Expats can avoid this process if they apply while non-UK resident. However, it is advisable to obtain local tax advice regarding any annual declarations that need to be made.
QNUPS are subject to ‘capped drawdown’ rules, meaning a lump sum and residual income can be taken from the fund at retirement. Income payments are scheduled according to Government Actuarial Department (GAD) rates. Importantly, this doesn’t mean the plan holder is obliged to take income as an annuity. So, on death, the remaining fund is paid to the nominated beneficiaries and is not retained by an annuity provider. Also, the GAD rate applied at retirement is a maximum, not a mandatory amount.
Although QNUPS are intended to provide retirement income, IHT benefits apply. On death, a QNUPS fund is paid to beneficiaries according to the plan holder’s expression of wishes without being included in the person’s estate. QNUPS don’t attract any other form of taxation to the beneficiaries, so they can effectively be passed on tax free.
How expats can benefit from QNUPS and estate planning
Many expats spend most of their working lives in an international environment. As such, they can’t invest in traditional UK pension plans and may have to organise their retirement planning more holistically. Others may not work abroad for extended periods but could be caught out by UK domicile rules or have reached their LTA limit.
For those who intend to retire in the UK, investing in a QNUPS while a non-UK resident can help reduce future tax liabilities and provide an income stream in retirement. A Pension Commencement Lump Sum can be withdrawn tax free in the UK, and the whole fund can be passed on to the next generation free of IHT.
Even if the plan holder doesn’t retire in the UK, a QNUPS is still a valuable planning tool to provide retirement income. UK domicile rules are difficult to accurately predict as we only really know where a person is ‘deemed domicile’ for tax purposes post-death.
A QNUPS can, therefore, be an effective way of planning for whichever country their IHT liabilities are based. Funds are paid directly to beneficiaries after death, and although local succession rules may apply, it’s always better to have the money first and then comply with tax legislation later.
Finally, QNUPS provide a wide range of investment options within the structure. Non-standard assets such as property and company shares can be included. However, most people create an investment portfolio comprising regulated mutual funds and securities. All global markets, currencies, and fund managers can be accessed.
Using a qualified and experienced financial adviser and tax adviser is important to ensure the effectiveness of your general financial and tax planning strategy.
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