Since April 2015, with the lowest interest rates in history, pensions have become a lot more interesting for all. The current excitement is around Defined Benefit transfers and QROPS, or more recently, ROPS.
Acronyms are generally a succinct way to summarise a concept, and there appears to be no exception in the case of QROPS: “Qualifying Recognised Overseas Pension Scheme”.
Having said that, those five letters are actually an abbreviation for a huge and complex aspect of pension planning which provide on one hand an excellent opportunity, but on the other a costly mistake.
The Fry Group has an extensive knowledge of QROPS and we recognise potential advantages such as:
▲ Wider investment options
▲ No tie to sterling
▲ Greatly improved options at retirement
▲ The ability to take a larger lump sum from the pension scheme
▲ Significantly improved IHT/Succession planning options.
Sounds good – can I have some of that please?
If you have a money purchase pension scheme in the UK, (and don’t forget, that’s what a QROPS is – a Pension Scheme), then it’s quite likely that some or all of the features could significantly improve your pension.
Is there a problem?
Not necessarily, but here are a few key points to consider:
▲ Will your transfer to QROPS be stifled by new HMRC (Her Majesty’s Revenue and Customs) rulings?
HMRC has clearly been overwhelmed by the number of pensions being transferred into QROPS and are concerned at the amount of money thus being taken out of the UK tax system.
HMRC’s first ruling was in relation to removing the QROPS status for non-EU countries such as Guernsey and the Isle of Man. More recently a 25% tax charge has been imposed on any transfer where the transferor is resident outside the EU.
They have also stopped confirming the status of the new vehicle as ‘qualifying’ until they decide, and after the transfer (hence our reference to ROPS).
It is worth noting that HMRC’s rulings are not retrospective, therefore schemes already set up are unaffected.
▲ Is your pension a defined benefit (DB) arrangement?
If yes, then to transfer to a QROPS could be very costly. If you are considering such a transfer, you should ensure (this is a legal requirement) that you have a pension transfer analysis formally produced by a UK pension specialist and Chartered Financial Planner which will detail how much your money needs to grow by each year to match the benefits provided by your DB scheme.
When establishing a QROPS there will be trustees’ fees to pay, as well as fees for the investment vehicle and for investment management. An employer’s DB scheme covers all the costs but after transfer these fees will of course be borne by the individual.
You should review your DB arrangement if returning to the UK.
▲ Does your DB scheme carry a widow(er)’s pension?
If yes, then care must be taken to ensure funds can be paid out. Where an individual has no dependents, there will be no widows pension payable in the event of death.
▲ Are you willing to take risk with your pension?
It has been a very difficult investment climate for the past few years.
▲ Are you sure about where you will live upon retirement and how the pension scheme will be taxed there?
Most European QROPS are based in Malta and when the fund pays out, you will not pay tax in Malta.
However, tax can arise at four other events:
1) Point of transfer
2) Tax Free Lump Sum
The first payment most people take from their UK pension/QROPS is the “Tax Free Lump Sum”, but will that be tax free in Belgium or wherever you are living at the time? (by the way the answer is ‘no it will not be tax free’).
3) Pension income
Income tax rates in Belgium are notoriously high, so it is vital to be absolutely clear on how income from your QROPS will be taxed.
4) Inheritance tax (IHT)
A QROPS transfer can glean significantly improved IHT options, but this only applies to UK IHT. Furthermore, the UK recently changed their own laws and UK pensions now remain out of scope for IHT until age 75.
So, are there any benefits?
Yes, indeed, but our understanding is that these benefits can be achieved only by those who meet specific criteria, especially given the very complex nature of both pensions and the tax shift in the UK and Belgium. It is also important to remember that there are many transfer options aside from QROPS.
If you would like to discuss these options or any aspect of your retirement planning, please do contact us.