This article looks at a QROPS case example and examines the technical aspects involved in the legislation. A QROPS or Qualifying Recognized Overseas Pension Scheme is quite a mouthful, but it simply facilitates a transfer of an individual pension fund from one country to another. EU regulations enable these transfers, although individual countries can decide whether to allow them.
Currently, only the UK allows unfettered transferability; however, in time, I believe all countries will also have to comply. It’s very important for anyone considering transferring their pension to be fully aware of how the legislation affects them personally. I would always advise using the services of suitably qualified advisers to make the initial assessment. A typical case study outlined below will show how a QROPS transfer from a UK pension can benefit those whose personal circumstances best allow them to take advantage of the legislation
Silvia is a European national who has worked in the UK for 20 years as an international lawyer. She is 63 years old and has decided to retire to Malta; she is aware that she can transfer her UK pension there. She has four pension pots from four different insurance companies, all of which are defined contribution schemes. Defined contribution means her pension entitlements are based on contributions from herself and her employer. These contributions are currently invested. Two of her schemes only allow benefits to be withdrawn as an annuity. Insurance company specialists who calculate annuity rates work out Silvia’s expected lifespan, then apply a percentage rate to the pot from which she can withdraw income. So, in the case of a 63-year-old, for example, this rate would be around 4% per annum.
Silvia has around £700,000 in her UK pensions.
Although Silvia doesn’t expect to work in the UK again, Lifetime Allowance (LTA) legislation means full tax benefits are only allowable up to a maximum of £1,073,100 on current legislation. If she leaves her pension funds in the UK and they perform well (say by 10% per annum), her £500,000 will soon exceed the LTA. Using the ‘rule of 7’ for simplicity, whereby the principle doubles every seven years if increased by 10% compound interest per annum, it would only take about seven years to reach her LTA. Although the Conservative government abolished the LTA, it’s rumoured that the new Labour government will reintroduce it. Silvia could then end up creating future tax liabilities.
Additionally, if reintroduced, the LTA could reduce in future years as we have seen the gradual erosion of the LTA from £1.8m to £1.5m to the current £1,073,100. 10% per annum compound interest is a good return; however, it is not impossible with the right investment portfolio. In Silvia’s case, she will either reach her LTA too quickly or her funds will have to perform badly to avoid this. Neither scenario is attractive.
Back to Silvia’s questions in the QROPS case. The answers I will give here are brief, and it must be noted that behind most simple answers is a plethora of technicalities that must be addressed and resolved.
Finally, although Silvia didn’t specifically ask about the Life Time Allowance legislation, her adviser has more good news as QROPS don’t impose LTA’s. So, rather than being penalised for good investment performance, Silvia will be rewarded as her pension can grow unrestricted, making her Pension Commencement Lump Sum and income higher. This will be important if the Labour government reintroduces the LTA.
The adviser’s job is to take care of all administration on Silvia’s QROPS, provide investment and tax advice, and carefully manage her pension with future servicing.
For further information, please download our free QROPS Guide