QROPS: Mind the Gap

    PARIS, FRANCE, January 22, 2016 /24-7PressRelease/ --There is often a knowledge gap in terms of what we know about pensions and how they actually work in practise. Let's start the year with a recap of developments in the world of QROPS. The more informed we are, the better decisions we make!

There have been quite a few changes indeed during 2015 in terms of legislation. The good news is that the main benefits of using a QROPS remain as before:

(i) You can still take a lump sum of up to 30% of your pension fund free from UK tax
(ii) Your pension can be denominated in the currency of your choice, which helps mitigate your exposure to exchange rates, whilst at the same time simplifying pension payments.
(iii) Upon death your pension can be passed on to your 'loved ones' free of UK inheritance tax

Things that have changed include the following:

1. A flexible drawdown facility is now available on pension transfers from the UK
2. There is now a distinction between a QROPS and a ROPS with the word 'qualifying' being dropped from the list published by HMRC. The HMRC website now hosts a list of Recognized Overseas Pension Schemes (ROPS)
3. Expats are not allowed to access their UK pension before the age of 55
4. The Lifetime Allowance is set to reduce to GBP1 million in 2016/17
5. Those seeking to make a 'final salary' pension transfer are obliged to obtain 'appropriate independent advice'

1. Flexi-access drawdown on UK transfers
Flexi-access drawdown from pension funds was introduced in the UK in April 2015. This means that 100% of an individual's UK pension fund will now be accessible after the age of 55. The same rules apply to those who transfer their UK pension fund overseas to a QROPS.

The full encashment of pensions however is not recommended, as this can often result in higher taxes on funds withdrawn. The preferred retirement strategy is to draw an income from the pension fund periodically in a tax efficient manner.

2. HMRC list of ROPS
In order for a scheme to be classified as a Qualifying Recognised Overseas Pension Scheme (QROPS) it must first of all be a Recognised Overseas Pension Scheme (ROPS) and provide benefits in respect of retirement, ill health, death or similar circumstances. If it meets these requirements, the scheme must take certain additional steps to qualify as a QROPS as defined by the legislation.

This list, which is updated twice a month, consists of pension schemes that have informed HMRC that they meet the conditions to be a ROPS and have asked to be included on the list. It is important to note that the list is self-certified by QROPS providers; HMRC do not have an official approval system for ROPS. It is therefore the responsibility of the individual to find out if there is tax to pay on any transfer of UK pension savings.

3. Access to UK pension
Tax relief in the UK is given on pensions to encourage people to save for later in life. It should also be noted that accessing benefits before the age 55 is likely to result in a liability to UK tax. Even if a provider is included on the HMRC list, they still have to abide by ROPS requirements.

4. Lifetime allowance
The Lifetime Allowance is a limit on the amount that an individual can accrue in a UK tax privileged pension fund. This is currently set at GBP1.25 million. When a members pension benefits exceed the LTA a tax charge is applied on the excess amount.

Any amount transferred to a QROPS above GBP1.25 million in the current tax year would be taxed in the UK at the marginal rate of income tax. The rate of UK tax payable on pension savings above the lifetime allowance depends on how the money is paid to you. The tax rate is:

(i) 55% if the pension is paid as a cash lump sum
(ii) 25% if distributions are made as pension payments or cash withdrawals

The LTA will be reduced to GBP1 million as of April 2016. This continues the trend in recent years that has seen the UK government cut the LTA from its peak of GBP1.8 million in 2011/12.

5. Appropriate independent advice
The new rules introduced in April 2015 stipulate that anyone seeking to make a final salary/defined benefit pension transfer of over GBP30,000 in value must obtain 'appropriate independent advice' from a company regulated by the UK Financial Conduct Authority (FCA). This can cause practical difficulties for those already living overseas.

As a result, overseas advisers have linked up with UK authorized advisers to facilitate pension transfers of larger defined benefit schemes. Unfortunately however there is an added cost to the client for such a facility; a cost which the client is not always happy to bear. The good news is that this cost can be deducted from the transfer value of the fund. Meanwhile, the Department for Work and Pensions in the UK has been made aware of the problem and is due to review the matter with a view to improving access to advice at affordable levels.

QROPS: Mind the gap
Transferring a UK pension overseas can be a complicated process. There are a number of challenges at different stages of the operation:

(i) It is important that ceding pension schemes conduct the necessary 'due diligence' on the proposed QROPS before transferring client funds
(ii) Schemes that apply for a ROPS registration must ensure that they remain compliant with current regulations and also any future changes in legislation
(iii) Advisers need to be on top of their game when it comes to recommending products and providers
(iv) The selection of a suitable jurisdiction is a crucial part of the UK pension transfer process

For more information please download our free QROPS Guide.

AXIS Strategy Consultants are a French regulated courtier d'assurance who specialise in providing advice on Qualifying Recognised Overseas Pension Schemes (QROPS) and retirement planning to international executives across the globe.

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