Many enquiries we receive are about QROPS. This paper sets out the key differences between a UK pension (usually a Self Invested Pension Plan – SIPP) and a QROPS (Qualifying Recognised Overseas Pension Scheme).
Why transfer to a QROPS?Flexibility is the overwhelming reason to transfer to a QROPS.
Income From A UK SIPPA UK SIPP will allow an individual to take benefits from age 55. The benefits from a SIPP are broadly 25% tax free cash of the entire fund and then a monthly or annual payment of between nothing and 120% of the limit set by the Government Actuaries Department (this is normally about 120% of the equivalent annuity).
In the UK the 25% lump sum is tax free and the income payments are subject to Income Tax.
The other option is to purchase an annuity – these can be written on various basis (joint life, index linked, guarantees) and are backed by government gilts – so the over all pension payment depends on the yield. A major consideration here is that annuities die with the annuitants and there is no way to pass these on to the next generation. Alternatively, annuitants benefit from mortality subsidy which can be valuable for those with longevity. Annuity purchase is an irrevocable decision.
If the pension owner survives to age 75 in the UK then (s)he must either purchase an annuity or change the arrangement where the income levels change. The new arrangement is known as Alternatively Secured Pension (ASP).
The new income limits are between 90% of the GAD as a maximum (equivalent to a 30% decrease) and a minimum of 55% of the GAD.
A QROPS has the same rules at outset as a UK SIPP, however after 5 years as a non UK resident have elapsed the trustees have no reporting obligations to HMRC. Income therefore can be distributed at more beneficial levels subject to the discretion of the trustees.
A key difference is that there is no compulsion to purchase an annuity at age 75, nor is there an enforced change in limits at age 75 where income will reduce automatically.
What is the position on death?If the policyholder dies before age 75 with a UK SIPP and leaves this fund to the surviving spouse then the fund is treated in one of two ways.
1. If the fund is not in payment the spouse receives the fund with no UK tax to pay.
2. If the fund is in payment the spouse has the following choices: purchase an annuity; continue with the existing arrangement; or take the entire fund as cash less a 35% automatic tax charge
If the policyholder survives beyond the age of 75 and then dies the surviving spouse has only two options:
1. To take an annuity
2. To continue with the existing arrangement ie the cash option is lost
If the surviving spouse opts for option 2, or there is no surviving spouse, then in the event of death the fund can be passed to a charity tax-free, or to other beneficiaries less an 82% tax charge.
If the cash option is taken pre age 75 an automatic 35% tax charge is taken
If the surviving spouse continues with the existing arrangement and subsequently dies prior to age 75 and the children inherit the fund there would be tax of 35% and then Inheritance Tax in the UK of an additional 40% subject to certain limits
If the surviving spouse continues with the arrangement and subsequently dies post age 75 and the children inherit the fund there would be a tax charge of 70% immediately and then a tax charge of 40% on the remainder for Inheritance Tax – equivalent to 82% tax. This residual amount must stay in a recognised pension fund, therefore denying access for future generations until they reach the age of 55.
With a QROPS there is simply no 35% or 82% tax charge. The fund can be paid as cash on death to the surviving spouse or be used to provide income. The balance of the fund on second death can be paid to beneficiaries without automatic tax charges being incurred
Are there any circumstances when I should not transfer to a QROPS?There are a few. Some older style pensions have Guaranteed Annuity Rates, and some pensions are final salary schemes which deliver a guaranteed income. Some UK based schemes offer lower charges meaning that a lower investment return may be needed to generate the same level of income. Anyone requiring a guaranteed income (i.e. annuity purchase) should also carefully consider their options, since income from a QROPS is not guaranteed.
Everybody’s circumstances are different, which is why it is important to obtain professional advice. For some clients the flexibility of a QROPS is very important as it offers the ability to pass pension funds to children, but for others the guaranteed income of a final salary pension fund are more important. Using advisers who are regulated in both Spain and the UK will ensure that the advice you receive is correct and relevant to your circumstances.
Are there any adverse tax consequences?If your fund is above £1.75 million and has not been granted enhanced protection then there could be a surcharge above this limit. Also if within the first five years the trustees step outside of the UK rules an adverse tax consequence could be triggered
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