Many questions are asked concerning a client and the benefits (or not) of transferring a pension scheme to a QROPS. Obviously each answer will be different depending on the individual circumstances. One of the questions that often come up is how a QROPS would be treated if the client returned to the UK at some time in the future as many people who intend to emigrate for their retirement end up returning to the UK. Another question is covering the comparison between a UK registered pension scheme and a QROPS.
As every scheme in the UK and as a QROPS is potentially different in some small way, these questions are very hard to answer specifically. On this basis, we have compiled below a general guide to some of the main points that need to be considered when deciding whether leaving your scheme where it is or transferring overseas is the correct answer.
This table is a broad indication only and should be read in conjunction with more detailed information on this subject including any impacts of double taxation agreements where they have been set up.
Please note. From 6 April 2017 new rules were introduced concerning transfers to QROPS and any potential changes made to the qualifying status of such schemes. This may potentially lead to a tax charge of 25% of the transferred (or proposed transferred) fund value. These details are covered in more depth in our Overseas Transfer Charge article.
|
|
QROPS - non UK resident |
QROPS - UK resident |
Registered UK schemes - UK resident |
|
Death pre age 75 |
Generally not subject to IHT or income tax in the UK but check there are no local death taxes in country of residence for client and QROPS. |
Generally not subject to IHT or income tax in the UK but check there are no local death taxes in country of residence for client and QROPS. |
Crystallised funds and funds within the LTA paid free from taxation or IHT. All uncrystallised funds will be tested against their personal LTA at death. |
|
Death post age 75 |
Generally not subject to IHT or income tax in the UK but check there are no local death taxes.
May not be seen as a tax-free distribution in the beneficiary’s country of residence. |
If the deceased has not been outside the UK for more than 5 years or the beneficiary lives in the UK, then UK rules will apply (i.e. taxable from age 75).
|
Post age 75 benefits will be taxed at the recipient individual’s marginal rate(s) of tax. If not an individual (i.e. trust) will be taxed at 45%. Normally no LTA test on uncrystallised funds from the age of 75. |
|
Flexibility |
Access to full pension flexibility offered under UK schemes may not yet be offered/mirrored by QROPS. |
Access to full pension fund from age 55 (rising to 57 from 6 April 2028) with 25% tax free and the residual funds taxed at recipients marginal rate(s). |
|
|
Investment |
Investment allowed in a huge range of investments overseas to utilise international offerings and currency fluctuations. |
Subject to UK rules and restrictions and so although the scheme may allow overseas investments these could be seen and taxed as taxable property. |
UK schemes generally invest in fully insured pension funds. External investments available via SSAS including commercial property, unit trusts and shares. |
|
Lifetime allowance test |
One test against the LTA at the point of transfer out of the UK if under the age of 75. |
One test against the LTA at the point of transfer out of the UK if under the age of 75. |
Tested against the LTA at the point of any benefit crystallisation event. If taken as flexi-access drawdown, would be tested again for fund growth at age 75 and purchase of annuity or scheme pension. |
|
LTA tax charge |
There is no longer an LTA tax charge when transferring. |
There is no longer an LTA tax charge when transferring. |
Excess can be taken as a lump sum by the individual less marginal rate tax before age 75, or left within the pension as an income fund with no LTA tax charge. All income is then taxed at the client’s marginal rate of tax. |
|
Income tax |
Subject to taxation in client’s country of residence and /or country where QROPS held subject to double taxation agreement(s). |
Taxed in the UK in line with UK pensions income rules. |
Taxed as income at the recipient’s marginal rate(s) of tax. |
|
Tax-free cash |
Funds can be potentially taken as a lump sum subject to local regulation if taken after the client has been non-UK resident for 10 years |
Tax-free cash is restricted to 25% of the client’s benefits |
Tax-free cash generally restricted to 25% of the client’s benefits or LTA if lower |
|
UK Legislation changes |
No longer subject to any changes within the UK legislation framework |
Although the benefits are outside of the UK, there may be an impact on the UK resident client under income tax and IHT |
Subject to all legislative changes. However, most detrimental changes offer a form of transitional protection for previously accrued benefits. |
|
Costs |
Costs generally perceived to be higher. The reason for higher costs is the added benefits and investment options offered. |
Same higher costs as for non-resident QROPS. However, some of the perceived advantages that justify the costs may not be available as the client will still be subject to UK taxation. |
Choice of plans and costs from auto enrolled schemes being cheap to competitive platform products to fully self-invested / self-administered schemes. |
|
Advice |
Need local adviser to deal with QROPS knowing the legislation in the country of residence of the client and the QROPS provider. Possible pass-ported advisers. |
Combination of adviser knowing about the QROPS and that country and also UK legislation for taxation. Possible pass-ported advisers. |
Qualified UK adviser. |