QROPS changes being considered and how they will dramatically affect the way expatriates take care of their nest eggs.
Considering what you are allowed over one life span of a pension this is how it is judged and can affect taxation of a pension. I f you are the 1% with a pot over 1.8 million (88.2 million baht), which will be amended to 1.5 million from April of next year. Then you will be affected, however the vast majority of expats won’t notice. If your pension pot is valued at less than 1% of the lifetime allowance, you could be eligible to reclaim a 100% refund. Thus the reduction could affect you at this lower end of the scale.
UK expats are luckier in the fact that the compulsory annuity at 75 for money purchase schemes will be scrapped. Converting to QROPS means you are not made to convert it into an annuity, selling off your savings for an income stream.
If your pension stays put in ULK then there’s no Inheritance tax but dying is expansive at 55% of the value if you pop your clogs after 75 which let’s face it that’s you and me!!
QROPS peace of mind
So, the benefits of transferring your UK pension to a QROPS are:
Scheme held in trust _ not owned by you.
30% initial lump sum available after five years offshore.
Pension payments made to you free of UK income tax.
Flexible pension payment calculations within QROPS rules.
Unlimited global investment choice.
Diversity of investment currencies enables more forex control.
Schemes available all over the world.
Residual lump sum available to whomever you choose as heirs.
Residual lump sum free of UK inheritance tax.
Even with these benefits many organizations are still seeing only 3-5% of expats taking advantage of this scheme. Many expats are unaware of these benefits and a good IFA would be able to help.
One of the major changes currently under consideration relates to defined benefit or occupational schemes. If you belong to this type of scheme, your pension benefits will be calculated according to your length of service with an employer at an accrual rate.
Say you worked 30 years for a company; you would receive a pension based on 30 years of service divided by the accrual rate, of say 1/80th per year of service. If your final average salary was 70,000, your pension would be calculated as:
70,000×30 years/80 accrual rate = 26,250 per year.
You would also receive an initial tax free lump sum of 25% of the pension pot value. Your pension would be incremented by, say, the retail price index.The current proposal relating to these schemes is that they may be not allowed to transfer to any alternative scheme after April 6, of next year. This would include QROPS and is surely a step back, in that it specifically disallows pension scheme members the freedom of movement of capital they are entitled to under European legislation.
This type of scheme will give you a guaranteed income, usually incremented as well. Of course, the major offset here is the fact that you will pay UK income tax on benefits regardless of where you live. While there are clear advantages in defined benefit schemes, they also have some unattractive rules.
The first of these relates to expats who have attempted to transfer their schemes to a QROPS but whose scheme benefits have already begun payment. So, if you were a member of a money purchase scheme and had commenced drawdown from your pot, you would be entitled to transfer the remaining balance to a QROPS. Similarly, if you are a member of the defined benefit scheme and have commenced drawing pension payments, you are also entitled to transfer the balance of the scheme to a QROPS.
What we have found is that trustees of some defined benefit schemes have refused to transfer remaining values to a QROPS on the grounds that “the trust rules do now allow this”. The legal position is that such schemes may be transferred and we are aware of schemes that have acceded to such requests, allowing members to successfully move their pension assets to a QROPS.
Until a volunteer is prepared to challenge scheme trustees on this, potential members are subject to the interpretation of rules versus EU law on the freedom of movement of their capital. Meanwhile, provided there has been no withdrawal of benefits, schemes are obligated to comply with valid transfer requests.
Defined benefit scheme benefits are also very inflexible. Schemes have fixed retirement ages for members. If you were forced to retire early on health grounds, you would not be able to draw benefits early. The retirement age for all QROPS schemes is 55. Even then if you had extenuating circumstances that left you in a very difficult position, your QROPS trustees would have the flexibility to allow you to receive early benefits from your scheme.
If these rule changes go ahead and are implemented, the door would close on transfers from these types of scheme to a QROPS. It would then be up to an individual to challenge the UK government on the freedom of movement of capital rules.
QROPS guide
There is a further rule change currently being tabled for implementation in April this year. This is to the advantage of some UK and QROPS pension members. In line with the rule that annuities are now not compulsory, members with money-purchase schemes are allowed to make drawdown from their pension pots of any amount up to the limit of what would be paid as an annuity under UK government rules. Provided a pension pot is capable of sustaining an annuity of 20,000 per year or more, the excess capital may be withdrawn in cash. This withdrawal will be subject to income tax at the equivalent to the tax relief that was originally allowed. Currently a lump sum of around 300,000 would sustain an income level of 20,000. So if you have a pot valued in excess of 300,000, you may be in a position to make additional withdrawals from it subject to the rules. These will be clarified upon implementation in April this year.
QROPS have become a little more complex than they were probably intended. This is partly because UK pension rules have also been changing. Keeping up with the changes can be challenging. To look at your individual circumstances in greater detail, contact a professional adviser.
