For many expatriates and those planning to become non-UK resident, the introduction of Qualifying Recognised Overseas Pensions (QROPS) has brought with it unexpected benefits for their deferred pensions and pensions in drawdown… a veritable golden goose.
It is now relatively common knowledge that by transferring to QROPS you can achieve the following benefits –
- Your pension income can be paid to you gross, although you will still have a liability to tax in the country in which you are resident – properly structured this could result in you paying less tax.
- You will never be forced to buy an annuity from a life company, although that option always remains open to you.
- You have access to a lump sum if you have not previously taken the maximum from your UK pension before it was transferred.
- In most countries it’s a very tax effective way of holding your assets.
- Once you have completed five full and consecutive tax years of non-UK residency you can potentially have access to a higher and more flexible income than you can under UK pension rules, although the pension must be structured to be able to pay you an income for the rest of your life.
- If you are non-UK resident on your death and have completed five full and consecutive UK tax years at that time and you have not purchased an annuity from a life company, your pension fund can be passed to your spouse or family without the UK tax charge on your fund of up to 82% which would be the case if you leave your fund within a UK pension.
- More flexible currency options to eliminate currency transfer risks and freedom to invest in currencies other than Sterling.
The five year point of non-UK residency is pivotal to the tax and flexibility advantages of QROPS, in that HMRC have stipulated that they do not want to be advised about any events that would otherwise be outside of the UK rules after that point.
Unfortunately, this is where the abuse of QROPS commences. Some advisers are using the fifth year window to ‘trust bust’ pensions. In other words after five years they are using QROPS to get their clients up to 100% as cash from their fund, which is firmly against the spirit of what HMRC intended when giving individual QROPS their qualifying and recognised stamp of approval. So what if it is against the spirit of the legislation you might say? Surely it will be up to the UK government to change the rules if they want to stop it others may ask?
It would not be a shock HMRC removes QROPS approval for New Zealand schemes. There are currently over 50 New Zealand QROPS registered on the HMRC website. Some of these schemes are known as ‘unlocked NZ Superannuation schemes’. This means they do not have any rules that dictate the level of withdrawals that you take. In effect, after five years of being governed by the UK rules, there is nothing to stop you asking for a payment of up to 100% of your fund.
If QROPS approval is removed for New Zealand, then many pensions will be frozen in the schemes with nowhere to go. In short be suspicious of anyone who tells you that they can offer you a New Zealand QROPS unless you are planning to move to New Zealand and contribute to your pension plan in the future.
What are the risks of taking a chance and using a QROPS or a route that can enable you to take more than the permitted cash lump sum? Unfortunately, the penalties are severe even though you yourself never trust busted! Someone else completely unknown to you abuses the rules of your QROPS scheme and you too may be swept up in the severe consequences.
HMRC have made it clear that any company facilitating trust busting by the release of more than the maximum permitted cash will mean that all of the applications received by that QROPS will be revoked retrospectively so that all transfers from the outset will be subject to an unauthorised payment of charge regardless of how long the client has been non UK resident. These charges are collectible personally from each client across country borders. The penalties will even be collectible against clients who have not trust busted, as well as those who have, so the innocent get swept up with this too. Ignorance of the dangers by the client is not a defence, however reasonable it was for him/her to rely on the adviser.
So, what are the unauthorised payment charges?
The unauthorised payment tax charges are a percentage of the unauthorised payment (in this case the entire fund value) of up to 55%. If a UK registered scheme is deemed by HMRC to have made too many unauthorised payments HMRC can de-register the scheme, giving rise to a tax charge of 40% of the scheme assets; if it is not deregistered, the scheme still has to pay 40% of the unauthorised payments made in addition to the one imposed on the member .
For many expatriates and those planning to become non-UK resident QROPS really can be the golden goose; however, it is vital that you only take regulated and authorised advice to ensure that you don’t get caught out with others undertaking abuse of the rules. You should only consider QROPS that can’t breach the spirit of the UK legislation; be highly suspicious of any adviser who seems to be able to offer you high levels of cash from your fund.
Note that if you were to repatriate to the UK, after having transferred your UK pension to QROPS, it will become subject to UK pension rules again, regardless of whether you have started drawing your pension or not.
However, after you have been non UK resident for five or more UK fiscal years, regardless of whether you have started to draw your income or not, there may be the potential to transfer to a non-QROPS pension arrangement, as long as the benefits are no more generous than those available from the QROPS. Your pension would then not be subject to UK pension rules on subsequent return to the UK. The only income tax that you will be liable for will be on income received (regardless of where it has been remitted from, and assuming that you were a UK domicile and UK resident). The assets within the trust will be outside of the estate for the purpose of UK inheritance tax.