What are the advantages and disadvantages of QROPS?
Transferring your pension fund into a QROPS pension scheme is a serious decision, which should be undertaken with the benefit of professional advice. What can you expect the adviser to say, and what will their advice mean?
The main reason that people investigate the possibility of transferring their fund to a QROPS is that they donâ€™t want to pay UK income tax on their pension fund once they have left the country.
Before the introduction of QROPS in 2006, withdrawals from UK pension schemes made by members who had moved overseas were subject to an income tax charge of at least 25%, notwithstanding that the member had left the country. Accordingly, investors who planned to retire abroad felt that they were being held to ransom by this rule.
The QROPS system involves a long list of foreign schemes which are approved by the HMRC for receiving UK pension funds free from payments of UK income tax. To gain admission to this list the schemes must be treated and regulated as pension schemes in their own host jurisdiction. They must also report to the HMRC on payments made from the scheme within the first five years of the memberâ€™s non-residence. After that first five years, the HMRC falls out of the picture.
Accordingly, an advantage of using a QROPS is that you can escape UK income tax on your pension if you move abroad. You will be subject to the tax regime of your country of residence and the host QROPS country (if they are different). However, this is something that your QROPS adviser should take into account in your financial planning.
The UK pension system seeks to protect older people by insisting that pension scheme members purchase an annuity or make similar arrangements to provide an income when they reach 75. The system also restricts the members ability to draw down lump sums. These measures are ostensibly to assist members to plan their retirement in such a way that their pension pot lasts until their death.
This may be very sensible, but members might have other ideas about how and when to spend their pension monies. For example, you may wish to withdraw a larger lump sum than the UK system will permit, in order to help your children onto the property ladder.
This is where a QROPS can be beneficial. If you outline your plans to your QROPS adviser, he or she can choose a jurisdiction that permits investors to withdraw monies sooner than the UK regime would allow.
Exchange rate certainty
Fluctuations in interest rates can knock thousands off the value of your pension scheme. If you are planning to retire overseas and receive income from a UK pension, this is an important factor in your financial planning. Transferring your pension to a QROPS and receiving an income in the currency of the country where you live might help you. On the other hand, some QROPS let members hold funds in a different or combination of currencies.
Inheritance tax rules
The pension fund of an ex-pat is still liable to UK inheritance tax, if it is held in a UK scheme. Some QROPS allow your beneficiaries to take the fund or assets held by it tax free on your death. Other jurisdictions make a charge to inheritance tax but at a rate that is preferential to the UK system. Your QROPS adviser should be able to tell you which jurisdiction would best suit your needs for the purposes of inheritance tax planning.
Notwithstanding the growing popularity of SIPPs (self invested personal pensions) in the UK, there are still many restrictions about what can and cannot be held by a pension fund. Some QROPS host countries (like Guernsey) are much more relaxed about what class or classes of assets your pension fund holds, and how much control you have over them.
Depending on your situation, there may be some drawbacks to using a QROPS.
If you are lucky enough to have a defined benefits scheme like a final salary arrangement, you will need to consider carefully whether you will lose any benefits of your pension scheme as a result of the transfer to a QROPS. Your QROPS adviser should be able to give you enough information on this point to make a decision.
Wanting to go back
If you want to return to the UK within five years, a Qualifying Recognised Overseas Pension Scheme Â may not be for you, check with your adviser.
Fees and charges
QROPS trustees charge fees for administering and managing pension funds. Examine these carefully, and assess whether the benefits of a QROPS will outweigh the costs.