Whilst considering the pensions announcements in the Budget my thoughts turned (amongst other things) to Qualifying Overseas Pension Schemes, or QROPS. In the new regime, why would anyone want a QROPS rather than a SIPP (Self-Invested Personal Pension)?
It goes without saying that this article assumes that the individuals concerned are outside the UK or are intending to leave the UK.
Well let’s get the obvious ones out of the way first – if there is any requirement or ability to get tax relief and/or pay ongoing contributions, then my assertion would be that a SIPP should be the chosen vehicle.
A flexible solution?
At the end of the accumulation stage of pension planning there has been a perceived interest in using QROPS to avoid issues with the Lifetime Allowance (LTA). Transferring to a QROPS is a benefit crystallisation event, freezing the LTA at the point of transfer. Consequently, any growth in the fund while in the QROPS is beyond the LTA charge.
In the right circumstances, for the right people, this could well have some merit. However, for a lot of people QROPS have been presented as a flexible retirement solution for the following reasons:
- Flexibility in taking retirement benefits that are greater than in the UK – so higher tax-free lump sum and higher than GAD income withdrawal rates
- Tax flexibility on the amounts taken out
- Lower tax rate on fund on death
- Wider investment flexibility
- The comfort of a provider who understands pensions in the country of retirement
- The ability to invest in the currency in which retirement income is likely to be needed
Let’s look at some of these points.
The proposed new retirement regime in the UK takes away the need for GAD rates, as any money can be withdrawn subject to tax at any time. This is a more flexible regime than any QROPS regime that I have seen. Some QROPS jurisdictions might offer people a higher Pension Commencement Lump Sum at 30%, but only if they can guarantee that the remaining 70% of the fund would provide a lifetime income. To me it looks like the UK will be more, or at least as, flexible in the future.
Tax paid on benefits taken will very much depend on the tax payer’s own status, namely residence and domicile. The key is to pay tax at the lowest rate, in the most suitable place, and to avoid paying tax both in the country of origin and the country of residence.
The UK has a large number of double tax treaties (in excess of 160), the aim being to recognise and avoid the need to be taxed in both countries. So, if the UK has an agreement with a particular country then it should be possible for tax to be paid in the country of residence.
In the future, will it make sense to take money from a SIPP and have it paid to the country of residence if there is a double tax treaty in force? An issue is that double tax treaties cover certain payments only. Will the payments made under the new pension regime be covered by the appropriate definitions?
Tax on death benefits: SIPP v QROP
One of the fundamental factors in the success of QROPS has been the ability to avoid the 55% tax on death that applies to crystallised funds. A reduction in this rate is expected to be one of the fundamental parts of the new regime, and is part of the ongoing consultation. It seems as though it will come down but we will not know the exact rate until the Chancellor’s Autumn statement.
Whatever rate is finally decided will be important and a determinant in the attraction of a QROPS.
One factor that might assist this decision is the possibility of phasing withdrawals from the pension scheme without GAD limits. The amount required can be the amount drawn, thus leaving no uncrystallised money that could be subject to tax.
QROPS might well offer greater investment flexibility, but in retirement the SIPP regime will allow most of the investments that most people will ever want.
In many cases the argument for moving offshore to put the pension money in the country of retirement is a bit of a red herring. Lots of QROPS are set up in third countries which are often tax havens, with minimising a variety of taxes the reason for setting up the pension there.
Finally, currency risk, which can have a real effect on income drawn. This can potentially be addressed by SIPPs that allow investments in the appropriate currency, or by appointing an overseas investment manager. If this is not possible a QROPS might still maintain an edge.
A lot will depend on the final rules and whether we see any changes specific to QROPS.
One other important consideration that will undoubtedly play its part is that many QROPS have originated from transfers from final salary schemes. The announcement that such transfers must be advised by specialists and might not be able to proceed otherwise could well prevent a considerable number.
Other issues will be the effect of retiring abroad but returning later and, I guess, the charging structure of QROPS, which is often criticised for having many layers!
One thing I do think we will see is QROPS providers also becoming SIPP operators, either by acquisition or by moving into that field themselves.
There is no doubt that as long as people retire abroad QROPS will always be an option, but I think that the debate over SIPP v QROPS will continue – particularly if, as per the regulator, QROPS must always be on the agenda when retirement abroad is an option.
Note: This article reflects the view of the author. It does not necessarily reflect the view of Investment Sense Limited. The article has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author.
About the author
|Mike joined AJ Bell after 22 years with Winterthur (now AXA Wealth), where he was instrumental in both the development of their SIPP, and their pioneering work on income drawdown.
The holder of an LLB and LLM in European Law, Mike sits on the Financial Planning Committee of the ICAEW, and is an Associate of both the Pensions Management Institute and the Chartered Insurance Institute.
An ex-Chairman of the Association of Member-Directed Pension Schemes, he is an accomplished speaker and writer on financial services matters.