Are you planning on retiring abroad? Is your pension fund close to breaching the Lifetime Allowance (LTA)?

If you have answered yes to either or both of the above questions then considering a QROPS (Qualifying Recognised Overseas Pension Scheme) may be a suitable course of action. Whilst the pension freedoms introduced in April 2015  which gave individuals greater flexibility on how they choose to use their funds has reduced the attractiveness of using QROPS, there remains certain circumstances when it will provide clients with useful benefits.

From where did QROPS originate?

The history of QROPS dates back to 6th April 2006, when following the 2004 UK Finance Act, new pension legislation came into force with the objective of simplifying pensions, these were dubbed the ‘A-Day’ reforms. The legislation which made QROPS possible however, ultimately came about as a result of an EU Directive which governs the freedom of movement of goods, services, people and – where pensions are concerned – capital.

Contrary to popular belief then, QROPS were not some tax loop hole or other form of generosity from HMRC, but the result of an EU Directive. For the vast majority of UK residents QROPS will offer nothing that can’t be gained from investing in a Self-Invested Personal Pension (SIPP). However those individuals that are planning to retire abroad or are in possession of pension savings that are in danger or breaching the LTA, then a transfer to a QROPS may offer a potential solution.

The falling Lifetime Allowance

Since its introduction on 6th April 2006 the Lifetime Allowance has governed the overall limit of tax privileged funds an individual can accrue. When a member of a pension scheme takes benefits, dies and at certain other times, the amount of the LTA used is tested. These are known as Benefit Crystallisation Events (BCE) and there are 13 scenarios in total. When a BCE is triggered and the total value of the members funds are in excess of the LTA, a Lifetime Allowance charge is applied to the excess. The charge is 55% for benefits taken as a lump sum or 25% for benefits retained to provide an income.

The Lifetime Allowance has changed almost every tax year. In the 2006/7 tax year the Lifetime Allowance was set at £1.5 million and gradually increased to its peak of £1.8 million for the 2010/11 and 2011/12 tax years. Since 2012, the LTA has been gradually falling, and now, as from 6th April 2016, this is set at just £1 million. In future years the LTA is expected to increase in line with the Consumer Prices Index (CPI).

Why QROPS can offer a solution

With the new lower Lifetime Allowance limit set to affect a larger number of individuals who will be at risk of breaching the limit at some point, a transfer to a QROPS can offer a solution. The reason for this is very simple: A transfer to a QROPS is a Benefit Crystallisation Event (BCE 8), and will result in the value of the members funds being tested immediately against the Lifetime Allowance. Once in the QROPS the funds will not be subjected to further testing against the LTA, and the members funds can continue to grow without having to face the unwelcome sight of a HMRC Lifetime Allowance excess tax charge in the future.

Choosing the right QROPS jurisdiction

Over the past few years QROPS rules have changed somewhat and this has seen some of the previously dominant jurisdictions of the QROPS market such as the Isle of Man and Guernsey be replaced by the likes of Malta, Gibraltar and even New Zealand. Choosing the right jurisdiction is not a straightforward process and it will be dependent on where you are living and also perhaps where you might find yourself living in the future.

Taxation will be a key issue here and it will be important to ensure there are Double Taxation Agreements in place where possible. Some leading providers now have schemes in all the major jurisdictions and will allow clients to switch freely between them if their circumstances change which can be a really useful feature for those with uncertainty as to where they will remain in the long-term. This is clearly a complex area and simply illustrates the need for each individual to receive impartial independent advice.

If you would like to learn more and explore whether a QROPS could form part of your retirement planning strategy, contact us today and request you own free financial review.

Some of the benefits of QROPS include:-
  • No requirement to purchase an annuity. Benefit from the same pension freedoms now enjoyed in the UK.
  • Access up to 30% Tax Free Cash – subject to living for a minimum of 5 years outside the UK.
  • There are no limits on contributions or fund sizes.
  • Testing against the Lifetime Allowance now.
  • Choice of currency eliminates exchange rate risk.
  • Ability to pass 100% of the full value of your funds to your loved ones without being subject to tax – including post age 75.

QROPS case study

David, 54, and his wife Janet, 51, live and work in the UK, and David has a SIPP valued at £1,200,000. The funds are invested in a portfolio of UK and international equities and David plans to leave the funds invested until he reaches age 60. David and Janet also own a second home in Spain and they plan to retire there once David stops working. David has applied for both Fixed Protection 2016 and Individual Protection 2016 which provides him with a protected Lifetime Allowance of £1,250,000.

David transfers his funds to a QROPS as this means his funds will be tested against the Lifetime Allowance (LTA) immediately upon transfer. As David has applied for LTA protection, his fund value is less than his protected allowance (£1,200,000 / £1,250,000), and he is able to transfer to a QROPS with no LTA tax charge due. David chose a QROPS in Malta as they have a Double Taxation Agreement (DTA) with both the UK and Spain, and they also permit the same flexible drawdown he would have enjoyed with his SIPP in the UK.

Over the next six years until David’s retirement he achieves net annual returns averaging 7% from his QROPS, and at age 60 his fund is valued at £1,800,000. David now decides to start drawing benefits from his fund. As David’s funds were tested against the LTA immediately upon transfer to his QROPS, they won’t be tested against the LTA again and so he has no tax to pay. He withdraws 25% as his Pension Commencement Lump Sum (PCLS) with the remainder used to provide him with a regular income through flexible drawdown.

If David had stayed in his SIPP; and assuming he made no further contributions, thereby ensuring he retained his Fixed Protection 2016; when he came to take benefits from his fund he would have been liable to pay a LTA excess tax charge of 25% of the excess over £1,250,000. If he had wanted to take the excess as a lump sum payment from his SIPP, this would have attracted an even larger 55% LTA excess lump sum tax charge.

David’s decision to transfer to a QROPS saved him from paying a LTA excess tax charge of £137,500.

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