As we near the date of Brexit, there is a rising interest in UK pension transfers and with that a demand for low cost QROPS solutions. The market for Qualifying Recognised Offshore Pension Schemes (QROPS) as a vehicle for UK pension transfers has developed significantly in the last few years. Changes in UK Government pensions legislation, with the introduction of flexible access and increased freedoms in terms of how benefits can be taken, has meant that QROPS providers have had to change their offerings to reflect the new legislative environment.
UK pension legislation background
Prior to the UK pension freedoms legislation of April 2015, ‘capped drawdown’ was the only option for individuals to take income benefits without having to purchase an annuity. For expats, capped drawdown rules required QROPS to be structured using the 70/30 method whereby 30% could be taken as a Pension Commencement Lump Sum (PCLS) and the remaining 70% could then be used to provide an income based on a maximum of 150% of Government Actuarial Department (GAD) rates. GAD rates are loosely based on annuity rates. For example, if the GAD rate for someone at age 65 wishing to take pension income was 3% per annum, the maximum payable would have been 4.5% p.a.
Pension freedoms introduced the concept of ‘flexi-access drawdown’ which effectively made capped drawdown redundant. Simply put, flexi-access drawdown, means retirees are now able to withdraw any amount they wish as income, although tax must be paid on amounts over and above the 25% tax free PCLS. Expats should note that the PCLS would be taxed according to the rules in the country in which they are resident, so might not be tax free.
The next change many QROPS providers had to make was to adjust the maximum PCLS allowable under their scheme rules to 25% rather than the 30% previously offered. Once again, this was to make sure QROPS comply with UK legislation, meaning no loss of QROPS status.
The emergence of low cost QROPS
The cost structures of QROPS have also evolved as a result of the increasing competitiveness of providers. QROPS, although an attractive proposition, have often been considered as a little expensive for smaller pension pots with fees ranging from £800 to £1,500 per annum. The initial one-off establishment fees can also be as much as £1,500. As a result, QROPS become prohibitively costly for anyone with a pension pot of less than £100,000.
The low cost QROPS Lite version
A combination of competitive pressure and innovation saw the introduction of the ‘QROPS Lite’. QLite plans were designed to make transferring to a QROPS much more cost-effective by reducing the initial fee and on-going annual charge. Some restrictions inevitably apply, such as the maximum transfer allowed, but the fee range has reduced considerably.
Taking all providers into consideration, low cost QROPS Lite plans can now be accessed with pension pots up to the value of £200,000, although many have an upper limit of £100,000. Initial set up charges are in the region of £300 with annual fees of £500. This means that the benefits of QROPS can now be accessed by a lot more people, at rates which represent good value for money.
Low cost QROPS Superlite
There is still the question of what to do with even smaller pension pots? Enter the Superlite QROPS! Superlite plans tend to have much lower maximum transfer-in values of up to £40,000. Fees are in the region of £250 for the initial set up and £250 per annum. There are other restrictions, including access to investment providers.
A range of solutions
QROPS now offer a range of solutions for anyone wanting to benefit from increased currency options, potentially more effective Inheritance Tax treatment and avoiding other UK taxation such as the Lifetime Allowance charge.
Everyone should review and reassess their pension and retirement position on a regular basis. It may just be that significant savings can be made for those who are looking for a home for a series of small pots, or simply to remove their pensions to avoid any undesirable Brexit outcomes.
AXIS Consultants can help by taking an in-depth look at your current arrangements and examining available options to save you money and improve your strategy.