UK pension Expert

UK Pension Expert

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QROPS

First introduced in April 2006, QROPS was designed to simplify transferring UK pensions to a pension-based scheme in a new country. The primary idea of the system was to provide equivalent pension benefits to all individuals who are planning to or have emigrated from the UK (as they would have received while serving in the UK).

Apart from that, QROPS has several other benefits for British expatriates who have worked in the UK for a period of time, such as tax breaks, estate planning facilities, and investment opportunities otherwise unavailable to UK-based retirement savers.

Post the 'Pension Flexibility 2015' statement, the methods to go about QROPS have changed and so have the benefits. Being able to find a clear picture of QROPS, its paybacks, and the procedure can be exasperating; that is where our team of UKPensionExpert comes for help.

QROPS Rules (Laid By HMRC)

As in every process, QROPS is also governed by a set of strict rules laid down by the HMRC (HM Revenue and Customs). The criteria outlined by HMRC for any overseas pension scheme to qualify as QROPS include:

  • The overseas scheme must be established outside of the UK.
  • The scheme should be regulated in the country it is established.
  • The scheme must be recognized for tax purposes in the country it is established.
  • The scheme must meet certain criteria laid out by HMRC, like restricting access till 55 years of age.

Any overseas scheme to qualify under QROPS should work as if it were a British pension to permanent residents living in the country for the previous five years. If the individual returns to the country, the scheme will once again be subject to UK pension regulations.

However, if an individual is not a permanent resident of the UK for the previous five years, the QROPS rules will be currently subject to the country of residence.

QROPS Eligibility

As in every process, QROPS is also governed by a set of strict rules laid down by the HMRC (HM Revenue and Customs). The criteria outlined by HMRC for any overseas pension scheme to qualify as QROPS include:

  • The overseas scheme must be established outside of the UK.
  • The scheme should be regulated in the country it is established.
  • The scheme must be recognized for tax purposes in the country it is established.
  • The scheme must meet certain criteria laid out by HMRC, like restricting access till 55 years of age. 

Any overseas scheme to qualify under QROPS should work as if it were a British pension to permanent residents living in the country for the previous five years. If the individual returns to the country, the scheme will once again be subject to UK pension regulations.

However, if an individual is not a permanent resident of the UK for the previous five years, the QROPS rules will be currently subject to the country of residence.

QROPS Eligibility

For overseas pension transfers, it is essential to note that all funds are not treated as QROPS. For example, if an ex-pat is retiring to countries such as Spain, France, or Portugal, the QROPS pension transfer will not be a viable option. Similarly, there are a few criteria to be eligible for QROPS, including:

  • You must be of age 18 to 65 years.
  • You are currently living or planning to move overseas.
  • You have an existing UK pension of value like employer or personal pension (other than state pensions).
  • You have not previously used any pension to buy an annuity (this does not include lump-sum withdrawal from the pension amount, if not used to purchase an annuity).
  • You should not have taken any payment from a ‘final salary scheme.’

Sometimes, even though a scheme is recognised as QROPS, a pension transfer may not be possible or permitted. This is because the eligibility to receive pension transfer to a QROPS also depends on the regulations of the current country, such as the United States of America. Similarly, there are a few criteria to be eligible for QROPS, including:

Benefits Of QROPS

01

Income and
Withdrawals

Withdrawals made through QROPS may often be taxed at a lower rate than any other UK pension. Therefore, it’s advantageous to make pension income withdrawals from QROPS as some can be paid gross or with a low withholding tax rate. Depending on the country and jurisdiction of the QROPS, individuals can declare withdrawals in many ways. For example, a withdrawal declared as an annuity payment may be taxed at a lower rate than a pension income withdrawal. Typically, all UK pension schemes have a 20% tax deducted at source whether or not the member is a non-UK resident.

02

Test Against Lifetime Allowance

As per the UK norms, there is a cap on the total amount of tax-relieved pension that an individual is allowed over his lifetime. In the previous financial year 2020-21, the lifetime allowance has significantly fallen to £1,073,100. Although an individual can build up as much pension value in his lifetime with no upper limit, the amount over and above the lifetime allowance will be tax charged up to 55%.

You could also apply for LTA Protection on pension savings (introduced after the lifetime allowance reduction from £1.25m to £1m in 2016) to reduce or avoid tax deductions. It can be done in two ways, Fixed Protection 2016 and Individual Protection 2016.

While both plans allow you to avoid any additional taxes, there is a crucial difference between the two. To claim Individual Protection 2016, you may or may not be an active member of a pension scheme, but for Fixed Protection 2016, you will need to have stopped contributing to a pension or other accrued benefits as of April 6, 2016.

03

Estate Planning

Although your beneficiaries may be subject to UK inheritance tax laws, they can benefit from transferring funds to QROPS as it does not work under UK jurisdiction or tax laws. When dealing with QROPS, it means the pension fund is outside of the pension holder's estate for the purposes of UK inheritance tax. So, beneficiaries do not need to pay taxes on any unused amount. But, the tax laws for the resident country will surely be applicable to the transferred funds.

04

Consolidated Pension Funds

QROPS allows individuals to consolidate as many UK pension funds into a single one. Consolidating funds significantly enhances the chances of better investment choices, save on charges, and also maximises growth. It also makes it easier to manage all the funds together in one.

05

Better Investment Choices

QROPS has a wide range of investment options which is not the case for UK pension plans. It allows you to make an informed decision and invest in various financial asset classes globally, like stocks and shares, bonds, and investment trusts. One other benefit of investing with QROPS is that there is no capping to the fund growth, and it is also free of capital gains tax.

06

Final Salary Scheme Transfer

For the past year or two, the transfer values for final salary schemes have been significantly higher than they used to be earlier. This is one major reason why pension scheme members are transferring their funds now.

07

No Currency Exchange Risk

When an individual is planning to retire out of the UK, leaving pensions in the UK will be subject to risky conversion rates. With QROPS, you can choose your currency under the scheme, receive and issue payment in the same currency. QROPS allows a reduced risk of exchange rate fluctuations.

08

Access to Funds

For QROPS, individuals can access their pension funds at 55 years. It also provides better lump sum withdrawal options (up to 30%) if you have been away from the UK for five consecutive fiscal years. In case you have not been offshore for that long, the drawable amount gets reduced to 25%. ``

Moreover, the pension funds can be transferred to a single platform so that you may access them online for payments and withdrawals at any time. ``

What Are the Tax Benefits Of SIPP?

Like any other pension or investment plan, SIPPs are also free of Capital Gains Tax and Income Tax, but tax relief is limited to the annual pension allowance and annual earnings.

As SIPPs are designed to encourage saving for the future, the government pays at least 20% of the total invested amount. The amount of tax relief you get also depends on the tax band, basic, higher, or additional rates. It is standard to claim 20% of the sum for all investments, but additional or higher rates can let you claim up to 20 or 25% extra through self-assessment tax returns.

For example, if your initial contribution is £1200 in your SIPP, the government adds 20%, that is £250, and you pay £1000. For the additional and higher rates, the amount you can claim in your tax returns is up to 20% for higher rates (£250) and up to 25% for additional rates (£312.5).

So, your total cost of SIPP contribution is different for the three types of rates: basic, higher (earning more than £50000 annually), and additional (earning over £1,50,000 annually). Basic Rate Taxpayer (20%): £1000 (1250-250) Higher Rate Taxpayer (20% + 20%): £750 (1250-250-250) Additional Rate Taxpayer (20%+25%): £687.5 (1250-250-312.5)

What Is SIPP Annual Allowance Carry Forward Rule?

In case you have not used your full allowance for the previous three fiscal years, you will be able to carry forward your SIPP annual allowance. This is the carry-forward rule. But, the carry forward rule has further eligibility criteria, including:

  • You should be a pension scheme member for all three years from which the carry forward will be processed.
  • You should have exhausted your current year’s annual allowance.
  • You should have contributed less than or equal to £40,000 in any of the last three years.

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