This QROPS Guide looks to explore the work that is required behind the scenes before you transfer your UK pension benefits into a Qualifying Recognised Overseas Pension Scheme (QROPS).
Ensuring you receive the very highest standards of professional advice from a suitably regulated intermediary is of paramount importance. You will be placing your trust in a Professional Adviser to select and recommend the most suitable and appropriate QROPS trustee. This will include the need to take into account the suitability of the jurisdiction of the scheme, plan charges and of course the underlying investment choice.
Since their introduction in 2006 the rules surrounding QROPS have changed somewhat and this has seen some of the original pioneering jurisdictions such as Guernsey and the Isle of Man fall away. The most popular jurisdictions are currently Malta, Gibraltar and New Zealand. Each QROPS Administrator has to be registered and approved with HMRC in the UK and will appear on a database within the HMRC website confirming that they have been approved. Ensuring that your scheme has been registered is a simple process and your Professional Adviser will be able to obtain a certificate for you from the trustees to confirm their eligibility.
Each jurisdiction has its own clearly defined rules around the taxation of pension income, death benefits and the pension commencement lump sum (PCLS) – which is the amount of tax-free cash you can take at the outset. The rules on taxation will vary, not only from jurisdiction to jurisdiction but also from country to country, in which the member is actually residing. For example Malta has many Double Taxation Agreements (DTAs) in place and this can result in the member being able to opt for a more favorable tax regime in their country of residence. However, caution needs to be taken here, as if the member is residing in a country with whom they do not have a DTA with, you may find yourself liable to up to 35% tax in Malta and then liable to further taxes in your country of residence.
Where there is an absence of any DTAs then a Gibraltar QROPS might make an attractive option as they have a low fixed rate of tax on pension income of just 2.5% which together with their zero tax on death benefits makes this an interesting option. This could be so for an expat residing in Brazil for example, as there is no DTA in place with Malta. New Zealand QROPS can pay income gross, however there are certain rules that need to be followed with regards to the investment of the funds that some may find limiting in comparison with the likes of Malta and Gibraltar QROPS. It is also quite possible that you may change where you are living in the future and thus might find that your original QROPS jurisdiction is no longer the most suitable for where you find yourself residing. A simple way to plan around such a scenario is to choose a provider that offers QROPS in a range of jurisdictions and with free switching between their schemes.
Following the UK pension reforms that came into force in April 2015, it is now possible for members of UK defined contribution schemes, which includes SIPPs (Self Invested Personal Pension Schemes), to withdraw as much as they want from their pension – once they reach the minimum retirement age – which is currently set at 55. It should be noted, that this change in flexibility is not automatically extended to QROPS. The relevant jurisdiction will have to pass local legislation, if this is not already in place, to make this possible. At this stage only Malta have issued an amendment to their pension laws, that will from January 2016, allow QROPS members to benefit from the same flexible drawdown that is now available in the UK. It should be noted however that sums taken in excess of the maximum of 30% available as a tax free lump sum will be liable to income tax.
Once the most appropriate jurisdiction has been established, a key factor to consider when selecting the right trustees is the Initial set up and ongoing annual costs to administer your QROPS plan. You will need no reminding that ultimately, these are coming out of your pension fund, so it is important to evaluate the costs involved compared with other available QROPS schemes. Whilst it might be foolish to make cost the overriding factor in your decision, as there are other factors one must consider here such as choice of jurisdictions, flexibility and underlying investment choice, paying too much is simply not necessary in such a competitive market. To learn more about low cost QROPS, you can visit our article on the subject here.
Also remember that the trustees are usually only responsible for the administration of your scheme and you will be required to pay for the investment advice on top of this. Cutting corners with regards to the investment advice is most certainly not something we would advise! The most successful of individuals understand the importance of good advice. Ensuring you have a well managed investment portfolio within your QROPS is certainly going to be the single most important factor as to how much income, not only you can sustain from your fund during your lifetime, but also your beneficiaries upon your eventual but inevitable death.
As a guide, set up costs for small schemes may be as little as £300 to set up the QROPS and a further £300 annually for the trustees to administer the scheme. On larger funds of £100,000 + the fees will increase to around £645 to set up and £845 per annum. The cost of managing the investments will likely be somewhere from 1% to 1.75% per annum depending on the size of your fund and the underlying investments that are being held and also the type of management service employed and the frequency of the performance reviews.
The Investments that you choose to hold in your QROPS fund is ultimately down to the member, subject to keeping within certain parameters, however much added value will come from the Professional Adviser entrusted with overseeing the advice process. The overall selection of investments will need to match the attitude to risk of the member and the critical yield required will also need to be taken into account (this is the rate of return required to provide and maintain an income at least equal to that which could be provided if an annuity had been purchased or match that of any guaranteed benefits that may have been given up when transferring from a final salary scheme). The underlying investments may include a mix of Cash, Fixed Interest, Property, Equities and Alternative Non-Stock Market correlated investments. These may be managed by your Professional Adviser, be part of a Model Portfolio or perhaps outsourced to a Discretionary Fund Manager (DFM).
The most important thing to remember is that your pension fund is a long-term investment that is supposed to provide you with an income for life, and after you have passed away, potentially your spouse and/or any nominated beneficiaries, such as your children for example. A great incentive of making use of a QROPS is this ability to pass on the full value of your remaining QROPS as a lump sum for your loved ones.
If you have UK pensions and you would like to explore your options, whether this be for a SIPP a QROPS or even a QNUPS, why not make use of our unique free report service, or if you prefer you can request a call back and choose a convenient time for an expert to contact you.