What are the Benefits of QROPS Pension Plan

15 Benefits of QROPS

QROPS offer some important advantages that no other type of pension scheme can give you. These include:

• What are the Benefits of QROPS?

  There are a number of countries that permit their resident nationals take 30% tax-free cash, as opposed to 25%, as it stands in the UK. Because HMRC stipulate that a QROPS must provide the same benefits to its members as those entitled to the nationals residing in its country - the QROPS jurisdiction - HMRC allow up to 30% to be drawn as a tax-free lump sum.
  
  A QROPS scheme only needs to keep 70% of the original transfer pot as retirement income. This is an important statement. The 70% that must remain in the QROPS is based on the value of the UK scheme on the date of the transfer to the QROPS, not the current value. This gives an incentive for one to transfer to a QROPS as long as possible before retirement, provided they already have built up a big enough pension fund in a UK scheme to realise the benefits of doing so.
  
  In the UK, the tax-free lump sum is limited to 25%, with a QROPS it can be up to 30%.
  
  This benefit alone is one of the most popular reasons expats transfer their UK pension into a QROPS. Receive 30% of your fund as a tax-free lump sum.
  
  Please note that you can only take 30% PCLS if you have completed five full tax years outside the UK.




• Avoid Inheritance Tax of up to 55% and easily pass on your wealth

  When you set up a QROPS, you nominate your beneficiaries (which you are entitled to change at any time), so that means you can pass on your wealth to loved ones far easier, faster and less stressful for your family than with you can with a UK pension.
  
  Another massive benefit to passing on your wealth through a QROPS is the fact that your family and loved ones will completely and legally avoid paying the Inheritance Tax (IHT for short) which is levied on UK pension schemes. This can be up to 55% of your pension’s fund value!
  
  Inheritance Tax (IHT) is calculated on your entire, worldwide assets if you are domiciled British, even when you are resident overseas. If HMRC can establish Britain was the country you regarded as home at the time of your death, your UK pension would be subject to IHT.
  
  If you have a UK pension, these funds will incur an IHT charge of up to 55% when they are left to your beneficiaries. IHT does not apply to QROPS, so you can sure the money you have worked your entire life for can be passed onto your loved ones free from tax at source.




• More flexibility over taking income from your pension

  When you transfer your UK pension into a QROPS, provided that you have been a non-resident of the UK for five years, you can benefit from significantly more flexible income drawdown rules.
  
  The amount of income you can take from a UK pension is calculated using the UK Government Actuarial Department (GAD) rates. Over the past few years these have been at historical lows.
  
  A QROPS is subject to the rules of its jurisdiction. Many jurisdictions around the world allow the trustees of QROPS pensions to use different actuarial calculations than those used in the UK under GAD. In some jurisdictions, this allows for up to 50% more income to be taken than in an equivalent UK pension scheme.
  
  Remember, QROPS will also be exempt from UK income taxes which usually range from 20% to 50% depending on much income you are drawing. So by transferring your UK pension into a QROPS a higher income, you can not only get more income but also avoid UK income tax completely – and have more money left in your pocket to enjoy your retirement.
  
  It’s also worth noting here that QROPS also gives you the ability to take a reduced income, or even take no income, if that is required. This is a feature also that is provided by a UK Self Invested Personal Pension (SIPP).
  
  "QROPS gives greater flexibility when it comes to taking income from your pension pot"




• Greater freedom over investment choice

  One big way in which QROPS are superior to UK pension plans is in their scope of investment choice. A UK stakeholder pension scheme tends to have low fees, but that’s because the scheme only offers a limited very choice of unit trusts and investment funds. Most of these funds are in-house versions of certain external mutual funds, and thus the life companies offering these schemes tend to make their money at the fund level rather than at the pension scheme level. On the other hand, old-style UK personal pensions tend to offer a wider selection of funds than stakeholder pension schemes, but can carry substantial charges.
  
  Many people do not know that their UK pension is run by a life assurance company, but this is indeed the case with the vast majority of UK pensions. Rather than giving investors the freedom to choose an investment from the entire market, the life assurance companies choose a limited selection of funds that are representative of the various different investment asset classes or sectors.
  
  Without wanting to delve too deeply into the investment side of things, let me provide you with a short example. Let’s assume for whatever reason, that you wanted to have exposure to US stock market in your pension fund. A UK pension from a life assurance company may have a selection of a few US equity funds to choose from. The chances are that these funds are not consistently the top performing investment funds in the world. With a QROPS you are not faced with these limitations. You or your financial advisor can go and search for the top performing fund in the top performing sector from any regulated fund in most regulated markets across the globe.
  
  Likewise, most traditional UK pension funds cannot directly hold stocks, bonds, money market funds, exchange-traded funds, exchange-traded commodities, real estate investment trusts, futures, options, commercial property, classic cars… the list goes on! QROPS can hold all of these and much, much more.
  
  Another concern for anyone living outside the UK is currency risk. You would find your investment choice severely restricted or blocked altogether if you wished to invest in a different currency, say Euros for instance.
  
  So if you require access to the best fund managers in the market and an unparalleled variety of asset classes, a QROPS is an infinitely better choice.
  
  QROPS offer the broadest possible selection of investments, allowing you, your financial advisor, or a discretionary manager to pick investments from a range of asset classes across the global market and maximise your growth prospects.




• No requirement to purchase an annuity

  In the past, 75% of the funds a person saved up in their UK pension pot had to be used to purchase an annuity from a life assurance company. An annuity provides guaranteed income for the rest of your life in exchange for a one-off payment (your pension pot).
  
  The downside is that annuity yields are and have been historically low in recent years. If you are in good health, or wanted to retire early this is especially true, since the life assurance company bases your annuity rate on your life expectancy and the number of years you are likely to live in retirement. The income that you would receive from an annuity would also be subject to tax and when you die your annuity dies with you. Imagine what would happen if you die early?
  
  Many older UK pension schemes automatically default into an annuity at a given time. If you transfer your UK pension into a QROPS, this danger is avoided, and upon death any money that you have not taken as an income will be passed onto your loved ones free of tax.




Superior tax-efficiencies

• A lot of countries impose lower taxes on income than the UK. This includes income on your pension. For example, at the time of writing, Gibraltar only levy 2.5% income tax on pension income benefits. If you were a higher rate tax payer under HMRC rules and you moved your UK pension scheme to a Gibraltar QROPS the tax savings you could achieve would be enormous!
  
  Depending on where you are residing and the jurisdiction of your QROPS, you can potentially pay far less, or even no tax on your pension income. If double tax treaties are in place then you have the choice to elect to pay tax in country where you reside, or the country where your QROPS is located. Obviously, you would opt for the better of the two choices. If no tax treaty is in place then you would normally default to paying tax in your QROPS jurisdiction. This is why to maximize your tax positions it is vitally important to speak




• Superior tax-efficiencies

  If you have UK pension it will pay you an income in sterling irrespective of where you live. This causes many people retiring abroad with either complicated timing issues to make the best of changing currency rates, or having to take a hit from time to time when exchange rates are unfavourable. Even if the exchange rates where favourable then you would still have the additional costs of currency conversion.
  
  Not only that, but if you are already outside of the UK, do not earn pounds and do not intend to return to the UK, there would be little reason to speculate on investments that were in denominated in sterling. With QROPS you could just as easily invest into and hold assets in any major currency. Obviously that would be the currency of your choice, rather to you being restricted to hold your pension funds in pounds.




• No Lifetime Allowance (LTA) charge

  In the UK, there is a maximum amount of money that an individual can invest into a pension and receive tax relief. This maximum limit is referred to by HMRC as the Lifetime Allowance (LTA). At the last Budget, the Chancellor reduced the Lifetime Allowance from £1,250,000 (2014-2015) to £1,000,000 (2015-2106*).This applies to the total value of all your pensions.
  
  *It’s worth commenting that the threshold the previous year was £1,500,000 (2013-2014). So the UK government have reduced the threshold by nearly 67% in just two years!
  
  If your pension fund exceeds the allowance you could be hit with a 55% charge on the excess. While £1,000,000 may sound like a lot of money to most people, many people in defined benefit (final salary) schemes may be reaching this threshold without even knowing it.
  
  What is also worth considering is that one cannot just stop paying into their pension once they reach the threshold to avoid the tax, since their investment value will likely continue to grow. Therefore, they could be hit with tax on the incremental amount every year that there investment grows to take them over the limit.
  
  One key benefit to transferring a UK pension to a QROPS is that pension funds will not be taxed, even if they grow past the LTA threshold after the transfer takes place. This presents a great opportunity for people who are approaching the threshold or believe they will do so in the not too distant future. Unfortunately, this does not extend to those who are already above the threshold. They cannot escape the tax charge and would hit with tax on the incremental amount over when making the transfer to a QROPS.




• Transparency of fees and charges

  Traditional UK pension schemes tend to have confusing charging structures, most of which are implicit in that they happen behind the scenes. These charges cause a large drag on your investment performance. These charges can put a serious dent in your retirement fund.
  
  By transferring your UK pension into a QROPS, the QROPS will ask your financial advisor to sign a tariff of charges which will clearly outline any and all costs relating to your QROPS scheme. Many UK schemes charge a percentage fee, whereas QROPS normally quote a fixed fee starting from as little as £395 per year.
  
  Please note that above we are referring only to the QROPS charges. There are likely to other charges relating to the investments and their management, plus transactional charges. Be aware that many offshore financial planners make substantial commissions by adding in multiple layers of charges into investment proposition.
  
  We strongly advise you to shop around and get a second opinion on any investment proposal that you have received. Many financial advisors in the offshore market are not qualified or licensed to advise you on investments or pensions. Ensure that they are suitably qualified and their investment recommendations are properly regulated in a major economy, such as the UK. Regulation in these countries ensures transparency and provides security, recourse and compensation should something go wrong.




• Ability to base your pension where it gains the best tax efficiencies

  When you transfer your UK pension into a QROPS, as we mentioned in our notes on tax advantages, you can either take advantage of the tax rules where you live – or a different jurisdiction which provides better benefits (lower taxes).
  
  For individuals who might move between countries, are moving in the future, or just don’t know where they will end up, many QROPS trustees offer schemes in multiple jurisdictions. These schemes allow you to freely switch your QROPS between jurisdictions to maximise its tax efficiency.




• Combine several pensions into one easy to manage scheme

  It is fair to say that most people accumulate contributions into more than UK pension over the period of their working lives. It can be challenging to keep tabs on exactly what is worth what and with whom. This becomes even more confusing in retirement, especially if you are abroad, when you may have income coming from several different sources, at different frequencies, at different times throughout the year.
  
  Smaller pension pots are likely to be eroded by more charges relative to bigger pension funds, so there are also likely to be economies of scale to being gained through consolidation.
  
  With a QROPS, you can merge any number of UK pension funds into one, easy to manage pension plan. By doing so it does not mean putting all your eggs in one basket, since you can benefit from enhanced investment choice, plus you will save money on charges and maximise you growth prospects.
  
  "By consolidating multiple pensions into one pension fund you can save on charges and maximise growth."




• Avoid changes to UK tax and pension legislation and protection from creditors

  When you transfer to a QROPS, your pension pot is will then be unaffected by the ever changing rules and regulations that affect pensions in the UK. This includes the likelihood that before long, the ability to transfer your pension fund into a QROPS could itself be scrapped altogether.
  
  QROPS members can also benefit from the advantage of increased protection against possible future creditors – depending on your QROPS jurisdiction – and greater confidentiality than if you left your pension in the UK.

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