QROPs and Lifetime Allowance Planning

QROPS and Lifetime Allowance

QROPS, otherwise known as Qualifying Recognised Overseas Pension Schemes, have been around since 2006. As the name suggests, they are an overseas pension scheme that has been set up in such a way that it is deemed as “qualifying” by HMRC.

They are usually based in tax beneficial regions such as Gibraltar, Malta, Cyprus and other countries with a less aggressive approach to tax in order to attract investment.

The scheme rules, security of the funds, investment options and cost of administration are all virtually the same as in the UK. Funds are held in designated client accounts that are protected against the country the scheme is registered in and can be invested here in the UK once set up.

QROPS can be a clever piece of tax planning as the transfer of the funds from a UK pension scheme into a QROPS triggers a “benefit crystallisation event” (BCE). This BCE tests the value of the pension at the time of the transfer against the lifetime allowance and any excess is taxed at the lower rate of 25%.

Once the tax has been paid and the funds transferred to the QROPS, any further growth is then outside the jurisdiction of HMRC, and any further investment growth is not assessed against the lifetime allowance.

This can be handy if you are very close to reaching the lifetime allowance, as no tax would be due when the transfer occurs. Then, any further growth would not be assessed for lifetime allowance purposes.

Even if you have exceeded the lifetime allowance, it is possible to split the pot, transfer the amount equivalent to your protected lifetime allowance to a QROPS and leave the excess in the UK to grow.

The investment growth on the majority of the funds, the funds inside the QROPS, can then grow tax free. And the funds exceeding the lifetime allowance can be left to grow in the UK until age 75, when a final lifetime allowance assessment is made. In this scenario, the hope would be that the lifetime allowance is scrapped before then and you gain access to the fund with no tax charge.

If the lifetime allowance still exists at this point, you can opt to pay a reduced rate of 25% on the excess. You can then leave the funds invested to continue to grow.

Tax-Free Lump Sum

Under pension freedoms in the UK, you are entitled to take 25% of your pension fund as tax-free cash when you retire. This is limited to 25% of the prevailing or protected lifetime allowance.

Tax-free cash is still available using a QROPS at 25%, and at 30% in some jurisdictions. However, this is based on the full value of the fund, not limited by the prevailing lifetime allowance.

For higher value pensions this can be advantageous, due to the increase in tax-free cash that would be available.

Income from a QROPS

As a UK resident, the income will be taxed in the same way as any other UK pension scheme. You still have the full use of your personal allowance, and basic and higher rates of tax remain the same.

Should you live abroad, tax will be paid subject to the rules in the country of which you are tax resident.

Inheritance tax & QROPS

Under pension freedoms the rules are similar, however, somewhat more advantageous through a QROPS.

If death should occur:

Pre age 75 – Under UK rules the value of the pot can be paid out tax free to the beneficiaries. This is limited to the prevailing or protected lifetime allowance. Any excess will still be charged as lifetime allowance at either 25% or 55%, and paid by your estate.

With a QROPS this is not the case. The full value of the fund can be paid tax free, and there is no lifetime allowance consideration.

Post age 75 – Under UK law the pension fund is inheritance tax free. However, income tax is paid on any withdrawal from the pension.

QROPS is very similar, with the beneficiaries paying income tax on any withdrawals. However, there may also be the option of some tax-free cash. The original value of the transfer to the QROPS, plus any tax-free cash and income taken are deducted from the gross value of the fund at the time death occurs. Any excess can be paid as tax-free cash to the beneficiaries.

Can you use a QROPS if you are a UK resident?

The common understanding is that UK residents cannot use the schemes. However, after recently conducting our own due diligence we concluded that there is nothing in the legislation that excludes UK residents from using one.

This was recently confirmed by the independent government body, the Pensions Advisory Service who also confirmed that QROPS can be used by UK residents.

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