The basics of UK Workplace Pension Plans will be explained in chapter UK Pension Trends. Now we will focus on international or alternative aspects of UK Pension Plans.
Expats from the UK
Expats from the UK, regardless of their nationality, who reside outside of the UK and have pension claims in the UK, might still be subject to UK taxation.
For such expats it might be very attractive to transfer their UK pensions to a Qualifying Recognised Overseas Pension Scheme or Qrops.
Or maybe a QNUPs or SIPP might be an interesting alternative.
A Qrops is an offshore pension scheme that has received recognition from HM Revenue & Customs. It is allowed to receive the transfer value of your UK pension funds. Qrops are often based in Malta, Gibraltar, Guernsey or Isle of Man.
Qrops for all kind of Pensions?
It is usually possible to transfer the value of any UK registered private or occupational pension scheme of Defined Benefit or Defined Contribution nature except for:
• UK governmental pension claims
• Insurance company annuities
• Defined Benefit pensions once in payment
Qrops for all your Pensions?
Expats often have several pension claims from different employers in the UK. All these pensions can be consolidated in one Qrops. Which decreases administration costs and allows for one investment strategy.
Qrops Investment Possibilities
Once your UK pension capital has been transferred to a Qrops, your funds have to be invested in a manner which reflects your agreed upon risk profile and investment horizon best. In general Qrops product solutions entail all usual investment categories such as investment funds, equities, corporate/government bonds, real estate and cash.
Often several currency options are possible as this allows a hedge against currency risks.
Qrops and residential Flexibility
Expats prefer to keep all options open. If you might unexpectedly return to the UK, you can keep your Qrops. The capital you originally transferred to the Qrops, becomes once again subject to UK legislation for registered pension schemes.
It is also possible to transfer a Qrops capital to a UK registered pension scheme. Or to another Qrops as depending on your location, one Qrops jurisdiction may be more suitable than another.
Certain trustees have Qrops products in several locations and offer free switches between these schemes. The most suitable option is then always available regardless where you retire. As many and substantial changes in legislation are expected, this is a valuable quality.
Qrops main Advantages
• To substantially reduce the income tax exposure in which execution Double Tax Treaties between the UK and other juridictions have a relevant role.
• Qrops are based in offshore jurisdictions and benefit from zero taxation at source contrary to many residential countries.
• Qrops avoid capital gains tax on asset growth as well as potentially avoiding inheritance tax and its strict UK regulations.
• rops do not oblige you to purchase an annuity which is a substantial advantage due to the current historically low interest rate. They also allow you to fully retain ownership of your assets. You can also opt for a percentage drawdown of up to 20% more than you could get by leaving your pension capital in the UK.
• Freedom to make additional contributions without a Lifetime Allowance limit.
• Qrops offer more next of kin pension options. Which includes passing your assets directly or investing assets for beneficiaries later on. Whereas UK pensions can have severe restrictions as well as being liable to UK Inheritance Tax.
• Qrops can prevent currency risks and can provide the lowest investment costs as they allow for the collection of all pension capital in one efficient portfolio. As return on investment is calculated by compound interest in the long run, this is a valuable quality which substantial effect should not be underestimated.
B) Qrops Tax Changes 2017
I] Increased Tax Exposure
In the UK pensions have been subjected to increasing tax restrictions as an attempt to reduce the use of pensions for tax relief.
Before 2006 there was no limit on the growth of pension capital. There was only a limit to the amount of contributions.
As of 2006 however due to the as of then installed ‘Lifetime Allowance’ of £ 1.8m, every excess above that amount faced a UK tax charge of 25% for pension annuities and 55% for pension lump sum. Which also applied to not in the UK residing expats.
Recently this Lifetime Alowance has even been reduced to £ 1 m which increased the tax exposure.
II] As of 2017
A fine example of the mentioned new domestic pension legislation are the new tax rules of 2017.
The transfer of UK pension capital to a Qrops used to have no tax charge in the UK regardless of its destination or the residence of the expat.
In the 2017 budget however it was announced that in essence:
• A pension transfer from the UK to a Qrops in one of the EEA countries ( EU plus Norway, Iceland and Liechtenstein) if the pension saver is resident in one of the EEA countries, will not have a 25% tax charge. (As the Brexit is near, this opportunity might end quickly.) In other circumstances that tax charge will apply.
• Pension transfers to a jurisdiction where after the transfer both the pension saver and the overseas pension scheme are in the same country, will not have a 25% tax charge.
In other circumstances that tax charge will apply.
• If the Qrops is provided by the individual’s employer, there is no 25% tax charge.
• If the Qrops is an overseas public service pension scheme and the member is employed by one of the employers participating in the scheme, there is no 25% tax charge.
• If the Qrops is a pension scheme of an international organisation to provide benefits due to past service and the member is employed by that same organisation, there is no 25% tax charge.
• The tax charge will apply if, within five tax years, an individual becomes resident in another country which renders the exemptions non-applicable.
• If the tax charge has already been paid, it will be refunded if the individual made a taxable transfer and within five tax years one of the exemptions applies to the transfer.
• When the tax charge applies, it will be deducted from the UK pension capital before the transfer is completed. Which is only applicable for pension capital transfer requests made on or after March 9, 2017.
III] Advice seems Appropriate
Qrops are not always transparent and can be complex.
In order for an expat to have the ideal Qrops, he needs to be aware of not only all product distinctions but also of the civil and tax legislation of both the UK as well as the offshore and residential jurisdictions.
An expat now also faces new UK legislation as well as the uncertainty of the Brexit impact.
It is our pleasure to provide advice to expats in order to create a tailormade yet flexible planning.
C) Qrops affected by Brexit
Expats from the UK with a UK pension scheme might in the near future be severely affected by the Brexit. As EU member the UK is obliged to allow free transfer of pension capital. Which allowes expats to transfer their UK pension capital to another jurisdiction within the EU.
When the Brexit has been implemented, the UK is no longer bound by EU legislation. It is a fact that the UK government prefers Qrops transfers to end as billions of pounds leave the UK with the resulting loss of tax income.
The UK government cannot prevent Qrops transfers until its EU membership ends. But it can implement severe changes in its domestic pension legislation which might make a Qrops transfer very unattractive.
Therefore it seems advisable to take all options into consideration and have a flexible planning.
D) SIPP as Alternative
SIPP/Self Invested Personal Pension
In case Standard Pension Plans or Qrops might have lost their appeal in certain circumstances, a Sipp might be an interesting alternative for you.
More Investment Options
A Sipp is a type of UK government-approved Personal Pension Scheme, which allows individuals to make their own investment decisions from the full range of investments approved by HM Revenue and Customs (HMRC). The HMRC rules allow for a greater range of investments to be held than standard Personal Pension Schemes, notably equities and property.
Investors may make choices about what assets are bought, leased or sold, and decide when those assets are acquired or disposed of, subject to the agreement of the Sipp Trustees (provider).
In essence a Sipp is a "tax wrapper", allowing tax benefits on contributions in exchange for limits on accessibility. Rules regarding for example contributions and benefit withdrawal are equal to those of other Personal Pension Schemes.
All assets are permitted by HMRC. However, some less standard investments like residential property, wine, stamps, vintage cars and art will be subject to tax charges.
Transfer to Sipp
As most providers are member of the standard in this respect, it should not be difficult nor costly to transfer an existing UK pension capital to a Sipp if all legal and tax requirements are met.
Beware of Costs
It is our experience that you do have to watch for the additional costs for this increased investment capability. In case the extra costs are too high, that is very expensive in the long run due to the substantial effect of compounded return of investments.
Beware of Communications
Due to the relevance of pensions and as they are always somewhat technical, we prefer Sipps that make an effort to provide simple and complete communications.
In the past we have seen to many Sipp providers who try to create a certain fog through which it is hard to see what is really happening. This does not exactly create trust. If a product is great, they will show it in full detail.
A Sipp can also help to make optimal use of the flexibility as offered under the new rules. Like regular onshore pension schemes, the tax-free lump sum amounts to 25% of the fund. The transfer charge as levied on some transfers to a Qrops does not apply to a SIPP no matter where the expat resides.
In standard Personal Pension Plans, the provider as Trustee has ownership and control of the assets.
In a Sipp the Member may have ownership of the assets as long as the Scheme Administrator is a Co-Trustee to exercise control. In reality, most Sipp’s have the provider as Sipp Trustee.
The role of the scheme administrator in this situation is to control what is happening and to ensure that the requirements for tax approval continue to be met.
In essence you can distinguish the following type of Sipp’s:
1) Deferred: The assets are generally held in Insured Pension Funds even though several providers offer direct access to Mutual Funds. Self-investment or income withdrawal activity is deferred until an indeterminate date. Newer schemes provide over a thousand fund options.
2) Hybrid: While some of the assets must always be held in conventional Insured Pension Funds, the remainder of the capital can be Self-Invested. This has been a standard offering from basic personal pension providers, who require Insured Funds in order to derive their product charges.
3) Pure: Schemes which offer unrestricted access to all allowable investment asset classes. The Sipp as it was meant originally.
4) Lite/Single Investment: A trend towards much lower fees for investments that are typically placed in one asset. For which one platform is classed as a single investment. If a future upgrade to a Pure Sipp is allowed depends on the scheme. As cost reduction can have a very substantial impact on the height of the final pension capital, this can be a good option. If coupled with optimal investments.
5) Expat Sipp: Specifically designed for the expat who leaves the UK and would like his already existing UK pension claim to be invested according to his own vision. Make sure that this does not result into a too high cost level.
When you reach your 55th birthday (or your 57th from 2028), you’re free to start withdrawing capital from your SIPP. Even if you’re still working. You can usually take up to 25% of your pot tax free. The rest of your withdrawals will be taxed as income.
In perspective of pension optimization it is advisable to start paying taxes as late as possible in order for that capital to create additional return on investment.
E) QNUPS: Qualifying Non-UK Pension Scheme
A QNUPS is a pension scheme based outside of the UK that qualifies for an exemption from the UK Inheritance Tax (IHT).
These schemes were created due to the Inheritance Tax Regulations 2010. They add to the retirement planning solutions available. They are open to UK residents, including those permanently residing in the UK, and overseas residents, including UK domiciled individuals.
QNUPS can be an attractive additional retirement savings plan if individuals have already reached the permitted limit of their domestic pension contributions. Therefore, UK resident individuals who have already used their annual and lifetime allowances, but who still prefer to make further provision for their retirement, might choose a QNUPS.
QNUPS may also provide attractive pension planning for non-UK resident and non-UK domiciled individuals who might decide to move to the UK. Or UK expats who might wish to return to the UK in the future.
QNUPS versus QROPS
QNUPS has become market terminology to describe an overseas pension scheme that meets the QNUPS regulations but is not a Qualifying Recognised Overseas Pension Scheme (QROPS). A QROPS however will always meet the QNUPS definition.
QROPS and QNUPS are highly similar and related pension schemes. Which one is more appropriate for an individual depends on their financial circumstances and the country in which they are domiciled and/or resident:
• Expats who reside abroad but are domiciled in the UK would benefit from a QNUPS;
• Expats resident and domiciled overseas, but who also have UK based pension assets that they wish to transfer, would benefit more from a QROPS;
• Furthermore QNUPS offer a wider range of asset classes than QROPS.
For a pension scheme to be recognised as a QNUPS, it has to meet rather strict HMRC guidelines. This does require companies providing QNUPS to reveal certain information to HMRC.
For a pension scheme to be considered a QNUPS, it has to meet these criteria:
• The scheme must have the same retirement age as would apply in the U.K.;
• It must only provide income after retirement;
• It must be available to the local population in the jurisdiction in which it is located;
• It must be recognised for tax purposes in the jurisdiction in which it is located.
QNUPS Usual Structure
Local jurisdiction states how local pension schemes should be structured. Many schemes follow this general structure:
• There is a Master Trust created which appoints a Corporate Trustee (the QNUPS provider) and their roles, powers and responsibilities regarding administering the QNUPS;
• The Trustee must be based outside the UK for the scheme to be a QNUPS;
• There are wide investment powers allowing flexibility for the Trustee to invest in assets like cash, bond, property, hedge, equity and commodity funds;
• The Trustee holds these investments on the member’s behalf and has investment powers;
• They will appoint an Investment Manager to see to optimal investments;
• The Trustee is responsible for making benefit payments from the QNUPS to the member.
QNUPS attractive for you?
Due to all the legal, tax and product demands, this requires specific advice about your personal situation. Feel free to contact us about your situation and whishes.