Continental/Spain Wealth Management – The essential QROPS Guide

UK pensions have traditionally had many restrictions. The good news for those of us now living abroad is that many of these restrictions can be easily avoided. This can be achieved by transferring UK pension rights to a Qualifying Recognized Overseas Pension Scheme (QROPS).

The key differences between a UK pension and a QROPS are detailed in this guide.

The key benefits of a QROPS are enjoyed if you have been non resident in the UK for a period of five full tax years. But for some an element of benefit can be immediate – for example the payment of pension without deduction of tax at source and a beneficial tax treatment of that income for residents of Spain and Portugal to name but two.

Why transfer to a QROPS?

Flexibility and potential tax benefits are the overwhelming reasons to transfer to a QROPS. It is rare indeed to encounter a situation where it is better to retain pension rights within a UK pension scheme.

Pension and lump sum benefits when taken from a UK pension scheme

A UK private pension allows an individual to take benefits from age 50 – rising to 55 from April 6th 2010. The benefits from a UK pension are broadly a lump sum of up to 25% of the fund and then a monthly or annual payment of between nil and 120% of the limit set by the Government Actuaries Department (GAD) - this is normally therefore about 120% of the equivalent annuity.

Alternatively if the private pension is a Company scheme the UK pension will be in the form of a set income basis after the lump sum has been taken. This income will normally have some degree of inflation linked increases and a reduced pension payable following the member’s death to a surviving spouse or other dependant.

In the UK the 25 % lump sum is tax free and the pension payments are subject to Tax as earned income.

The other option (other than from most Company schemes) is to purchase an annuity. These can be arranged on various bases (joint life, index linked, and with or without guarantees) and are backed by Gilts - so the overall pension payment depends on the yield then available in the Gilts market. A major consideration here is that annuities die with the annuitant. An annuity purchase is an irrevocable decision.

Continental/Spain Wealth ManagementAlan Cooper, Les Basetes 97L’Atzuvia, 03786AlicanteOffice tel: +34 965 977 251Mobile: +34 665 82 44 26http://www.acfin.co.ukwww.continentalwealthmanagement.com

Premier Pension Solutions SL (CIF B55414198) is registered with the Comision Nacional del Mercado del Valores (CNMV) and Direcion General de Seguros y Fondes de Pensiones (DGS) and is an authorised agent of AES Financial services (UK) Ltd, authorised to conduct investment and insurance business.

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If the private pension fund member survives to age 75 in the UK then they must either purchase an annuity or change the arrangement into something called an Alternatively Secured Pension (ASP). ASP has more restrictive income limits than those that apply before age 75 – and on death the remaining fund will be subject to a tax charge of at least 70%.

Pension and lump sum benefits when taken from a QROPS.

A QROPS has the same rules at the outset as a UK scheme unless or until the member has been non UK resident for more than five complete UK tax years.

Income as a consequence may then be available at more beneficial levels subject to the discretion of the QROPS trustees. In addition once the five complete tax year rule has been satisfied the timing of benefit is based on the law of the land where the QROPS is based. This can enable benefit in some form to be available before age 50, and can also enable the release of a capital sum.

In overseas jurisdictions there is no effective compulsion to purchase an annuity by age 75 – nor does any tax apply on the remaining fund following death.

What is the position on death for the member of a UK pension scheme?

If the UK private pension scheme member dies before age 75 and leaves this fund for the benefit of a surviving spouse or other dependent then the fund is treated in one of two ways.

1. If the fund has not yet been used to trigger benefits the surviving spouse or other dependent (or any other person who has been nominated to receive the fund by the deceased scheme member) receives the fund with no UK tax to pay.

2. If the fund has been used to trigger benefits the surviving spouse or other dependent has the following choices: purchase an annuity: continue with the existing arrangement: or take the entire fund as a lump sum less a 35% tax charge which cannot be avoided.

If the UK private pension scheme member survives beyond age 75 and then dies the surviving spouse or other dependent (where an annuity has not already been secured) has two options:

To buy an annuity or To continue with existing arrangement and draw an income from the fund.

But then following the death of the surviving spouse or dependent: If an annuity has been put in place by the survivor this will die with them If the surviving spouse continues with the existing arrangement and

subsequently dies prior to age 75 and the fund is inherited there would be a tax of 35%.

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If the surviving spouse or other dependent continues with the arrangement without buying an annuity and subsequently dies after age 75 and the children (say) inherit the fund there would be "unauthorised payment" charges (in simple terms tax) at the rate of 70%.

The balance of the fund would, where applicable, be subject to UK inheritance tax bringing the total tax take to up to 82%.

What is the position on death for the member of a QROPS?

With a QROPS there is simply no 35% or 70% tax charge as would otherwise be applicable under UK rules. The whole fund can be passed on tax free, and in addition the fund is not subject to UK inheritance tax.

The fund can be paid as a lump sum on death to the surviving spouse or other dependent or be used to provide an income. The key point is that whatever method is used to provide benefit following death no UK tax liability arises. For many this is the single key point that makes a QROPS so overwhelmingly attractive for the long-term expat as compared to a UK pension scheme.

Investment flexibility

UK private pensions are subject to various investment restrictions. After five complete tax years of non-UK residents QROPS will be subject to lesser restrictions and in some jurisdictions effectively no restrictions at all. So it is possible to obtain much more investment freedom than is available with a UK private pension.

This can for example enable the purchase of residential property with the QROPS fund.

Another advantage of a QROPS is the ability to have your pension fund held in Sterling, Euros or some other currency of choice.

Are there any circumstances when I should not transfer to a QROPS?

Some of older style UK pensions have attractive Guaranteed Annuity Rates (and so gave a guaranteed level of income for a given level of fund). Sometimes the transfer value offered can be particularly penal.

However in our experience in the overwhelming majority of cases a QROPS is the overwhelmingly more attractive option.

Please note however that it is not possible to transfer benefits that are already in payments from a company pension scheme. Nor is it possible to transfer a UK pension annuity that is already in payment or the UK State pension.

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Is there any adverse tax consequences associated with a transfer to a QROPS?

If your UK pension fund is worth more than £1.75 million (the lifetime allowance) and has not been registered so as to give the appropriate protection then there could be a tax charge on transferring to a QROPS on the fund value in excess of this limit.

Also if during the first five complete tax years of non-UK residence benefits are taken that are in excess of what will be allowed under UK rules a tax charge will arise.

What size of pension fund is viable for a QROPS transfer?

Where a capital sum is required and the UK pension holder has already been or is relatively close to being outside of the UK for five complete tax years then we can deal with funds that are small, even down to around £12,000.

Where the objective is however to maintain most of or the entirety of the fund to provide benefit from the QROPS then generally the UK pension fund needs to have a transfer value of at least £100,000 to £120,000 to make the arrangement viable from a cost perspective.

Can I arrange a transfer to a QROPS myself or should I seek advice?

It is theoretically possible to try and research the QROPS market yourself and find out the transfer value of your UK pension rights. The benefits of receiving advice however include:

1. Knowing that the QROPS recommended to you has been based upon knowledge of the QROPS market (schemes and jurisdictions) as a whole.

2. The fact that advisers like ourselves are able to negotiate lower QROPS fees that are contained in the literature published by QROPS providers.

3. Receiving a detailed comparison of the benefits arising from a QROPS as compared to the benefits arising from a UK pension scheme.

4. Knowing that the advice given to you and thus the QROPS recommended has been tailored to your specific circumstances and requirements.

Alan Cooper. Ch. Engr.

Continental/Spain Wealth ManagementTel: +34 965 977 251Mob: +34 665 82 44 26Office email: alan.cooper@continentalwealth.comPrivate email: acjc97@yahoo.com

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