Have you ever had a conversation with someone about a topic they should know a lot about and you don’t and you actually find you seem to know more than them? It’s a bit strange when you meet somebody who is ignorant of something they should know about. It comes from a place of reading a lot and gathering information on many topics.
A high level overview of something at least helps you choose the right expert to assist you. It’s the same with a UK pension benefits. Just because somebody is a financial adviser and they should know a lot about it, doesn’t mean they do. Since this happens quite regularly, I wanted to write this article that you can skim through and have a fairly quick grasp of 21 QROPS Pension Benefits and what you need to be aware of. Everybody is a bit different so they might not all apply, but quickly skim through them.
The Top 21 Pension Benefits You Must Know
01. Reduced Taxes Based On The Lifetime Allowance
You’re going to need to pay tax, but would you rather pay tax on a smaller or larger amount?
The smaller amount obviously. So instead of waiting for when you retire and your pension benefits have grown nicely, before you see how much tax you need to pay, you can do the test now at your current pension value.
Would you rather pay tax on a £1 000 000 pension today? Or would you rather pay tax on a £2 000 000 pension when you retire? This can yield some SIGNIFICANT tax savings!
Did I mention that the UK government keeps wanting more taxes? So they keep reducing the LTA (Life Time Allowance), which means that the more you exceed this allowance the more tax you pay! It was £1 500 000 in 2006. It’s now £1 250 000. So that means you’re now paying tax on a extra £250 000!
How much more extra tax will you pay when they reduce it even further by the time you retire if you don’t migrate your funds to get maximum pension benefits? A lot if my guess!
02. Taxed In Country Of Residence
Everybody knows that the UK has a very high taxation rate. Would you rather be taxed on a lower taxation rate? YES!If you’re outside the UK you can elect to pay at the tax rate of that country rather than the higher UK tax rate. What does this mean for you? Yet another tax saving to add to your other pension benefits.
03. 30% Tax Free Lump Sums VS 25% In The UK
This means you can get more pension benefits when you retire as a lump sum1 at the start.
04. No Income Tax Charge On Death
As long as you’re younger than 75 and your pension benefits doesn’t exceed the Lifetime Allowance (Around £1.5m) your pension can be passed on to your beneficiary as a tax free lump sum. BUT BUT BUT if it’s after 75, well you’re probably going to have a 45% tax charge! You want to live longer than 75 right? If so, this is a massive benefit to take note of!
05. Final Salary Schemes Might Not Be That Safe Any More
Part 1. Companies come and go.
Everyone has read about that big company that would never go bust and did.If it’s someone else’s money, it doesn’t really impact you but when it’s your pension benefits that are at stake, it’s quite serious!Now, the problem is these final salary schemes are very generous and this has meant that most have been forced to close, restrict access or reduce benefits because they are so expensive for the employer to provide and operate. It’s often easier to strip a company of it’s assets, close it, than honour the final salary scheme liability. This happens more often than you think!There is a Pension Protection Fund (not backed by the UK government) so there is a bailout plan in case the worst happens.If it does, they only cover to a max of £2 700 per month (when you retire!). So if you have larger pension benefits, tough luck!
Part 2. Your pension may die with you. So even if you’re getting a great payout, and you die, you’ve probably got someone you love or care about. Wouldn’t it be nice to be able to leave them some of your pension benefits (unless you’re Scrooge?). If you are a deferred member and don’t have a spouse or dependant (child under 23) then your pension income2 will die with you. If you do have somebody you care about they will ever only receive a much smaller portion of your pension benefits than you where receiving.
06. Save 10% Tax If You Return To The UK
So you might change your mind and decide you’d like to retire in the UK after all. Who knows what life holds, or your health for that matter when you’re older (the UK has a great health care system you might want to benefit from.) If you decide to return to the UK, since a QROPS3 is classed as a foreign pension, only 90% of the payouts are taxable. This means that you save 10% tax if you do decide to change your mind and retire to the UK!
07. Final Salary Schemes Funding Levels
Just because a company says they will pay out X amount to you every month when you retire, it doesn’t mean they will. They need to still be in existence when you retire which might be in 20 years time! Also, companies get bought, sold, merged and even closed down. All of these leave you with an empty promise. There is of course the PPF (Pension Protection Fund) which is funded through a levy of the various pension schemes (many of whom are in financial trouble) and NOT the UK government, but this only covers a portion of the pension in the event of default. So if you’re pension benefits are large, it’s not a great safety net!
By using a foreign retirement plan you take your savings out of this risky environment and control it yourself.
08. Avoiding Pension Oversight
When your pension benefits are in a big pot it’s not in your control. So maybe they had that amazing fund manager who then left and joined another company but your money is no longer being managed by them. When it’s in the big pot you have no control but when you have it with a QROPS you have a lot more control and avoid these basic oversights.
09. Portability If You Change Your Mind
While it sounds idyllic to retire to a specific country, maybe after 10 years you hate the food and decide you want to go somewhere else.
10. Exchange Rate Risk
The goal is to have your pension benefits paid out in the currency of the country you’re retiring in, because your expenses will be in that country’s currency. Even if you just look at the GBP to EURO fluctuation, (i.e. people who retire to Spain or France), there have been over 30% swings. So imagine your pension benefits amount to £1 000 000. It could be worth £1 500 000 when converted when you retire or it could only be £700 000, depending on the currency fluctuation. It’s not a risk you want to take and need to mitigate this currency risk.
11. Creditor Protection
If the worst happens and you go bankrupt (hopefully not),when your benefits finally commence (i.e. you retire), it’s possible for the courts to attach these to payout order. However, since a foreign retirement plans is in another jurisdiction4 with different rules, it makes it very difficult for courts to attach these payouts.
12. Do You Love Your Spouse Or The Pension Company More?
It’s a tricky question for some, but for most it’s an obvious answer. They want to leave as much of their pension to their spouse as possible! Many final salary pension schemes will only give 50% to your wife. With an offshore plan it’s possible to use up to 100% of the fund to provide a spouses pension. So I guess it all comes down to your answer if you love your spouse or your pension company more!
13. Want To Retire Early?
Most schemes only allow you access benefits after 55. With a QROPS in certain jurisdictions, you can access your benefits from age 50.
14. Clever Tax Planning
When your pension pays out an income this is taxed at the members highest marginal tax rate, somewhere between 0 and 45%! With a UK pension you can’t turn your payouts on and off as needed. With a QROPS you have the ability to choose when you get payouts. So maybe that year in the Bahamas (or other pretty tax free jurisdiction) is when you decide you want your payout. Hint..hint… A couple years in the Bahamas and a saving of up to 45%. Sounds good to me.
15. Keeping Things Ordered
You’ve probably changed jobs at least once in your career. Now with each new company you probably have a different pension scheme. Many people often have 5 different pension schemes with different rules (even a little pension pot for those 2 years they did in that crappy job). It’s a nightmare to administer it all. With a QROPS you can consolidate these all into 1 pot. Now that’s neat!
16. Want A Big Break From The Nasty UK IHT?
If you’ve got a lot of assets you might want to gain a domicile of choice. Why would you do that? UK IHT is pretty nasty and you’re likely to have UK domicile of origin which is difficult to lose. To change your domicile to one with MUCH more favourable IHT conditions you might need to cut ties to the UK. By transferring your pension it’s one less tie you have to the UK which could swing your domicile! (This benefit only applies if you have a very large estate.)
17. Want To Retire Early?
If you’ve got a final salary scheme you might only be able to get benefits from 60 or even 65! If you take it early you often incur a penalty which is around 0.5% per month. So if you retire 5 years earlier you can get up to a 30% penalty on the annual payout. What if your wife is ill and you want to go on a round the world cruise at 55? You can’t. You have much greater control and can sometimes even access your benefits from age 50 without any penalties!
18. Avoiding Nasty UK Pension Legislation
So you’re living abroad, but your pension is stuck in the UK. The government needs more money (all governments always need more money!), so they tweak a rule here and there. For example, they have cut the annual tax free allowance by 85%! It was £255k per year in 2010 now it’s closer to £40k. So that means more of your pension is taxable and that means…you get less money out.
19. Global Investment Options
UK pensions have extremely strict investment options that can be quite restrictive. Your investment options are wide open allowing you more diversification and possibly better returns.
20. You’re Not Required To Buy An Annuity
What’s an annuity? You basically trade in your pension for an agreed monthly payout. Some smart numbers people work out how much they can guarantee and what are the risks. BUT they’ve got to take your money invest it, pay you out your agreed monthly amount and make a profit. They can’t gamble and have some extremely strict legislation in what they can and can’t invest in.
Why is an annuity not always the best thing?
- Rates of return are at their lowest for approximately 40 years,
- Income is subject to income tax,
- They offer no protection against inflation
- and depending on the type of annuity purchased, it cannot be passed on when you pass away.
That doesn’t sound too great does it? I wouldn’t like to be forced to buy one of those. Also, you’re not forced to buy an annuity with many of it’s disadvantages.
21. Transparent Charges
Some of the UK pension schemes have layers upon layers of charges for funds that aren’t doing any growing, or very low growing at best. People don’t know what the charges are. Put it this way…let me ask ‘What charges are you paying for your UK pension?’ 98% of people can’t answer this question. So I guess the charges aren’t very transparent.
Anyone with a UK pension who has left or is planning to leave the UK, can now transfer their funds outside the United Kingdom to any country they are living in. There are various pension benefits when you transfer your funds offshore.5
Find out more about a Pension Release. Read our detailed article about BREXIT and QROPS. Make sure you are informed for all the benefits you can take advantage of.
Here Are Some Bonus Pension Benefits
- Investment opportunities with a wide range of funds available and freedom to choose your funds
- Ability to pass on pension funds to your beneficiaries upon your death
- Tax efficient structures
- The possibility of drawing a tax free lump sum
- Flexible currency as you choose your jurisdiction
- Tax planning opportunities depending on which jurisdiction offers a neutral location
Transferring your UK pension overseas brings much more benefits than keeping your UK pension in the United Kingdom and living abroad. Figures show that global QROP investors save over £1 million a day in taxes to HMRC and customs than if the money was left in under a UK pension scheme. That’s a lot of money that is being saved by individuals! In order to make the best investment decision its important to know the advantages of every QROPS jurisdiction, we’re here to answer any of your questions.
- When you take a QROPS you will have greater investment freedom. You will have more financial flexibility and choice of assets, commodities and stock markets across the world. This financial flexibility is not available for all UK pension schemes.
- You will be able to access global funds that may have higher returns.
- The pension benefits as a transfer can be made in most of the major currencies.
- For many jurisdictions, the pension benefits are paid gross in the currency you have chosen. This eliminates the fluctuating foreign currency exchange rates that could cause you to lose out on profits as well as any tax deductions at source.
- One of the biggest QROPS benefits is in taxes. You can choose to take a QROPS to a country that has either no taxes or substantially lower taxes. Your QROPS does not have to be in the same tax jurisdiction as yourself. You can move between different countries without making any more pension transfers. Pension benefits are normally taxed where the individual is resident for tax.
- You will also benefit from a tax free lump sum up 30% depending on your QROPS jurisdiction
- Many QROPS jurisdictions allow benefit payments to be made gross of tax.
Most UK fund holders should buy annuity, but if you choose a transfer, you do not have to buy an annuity. It is often said that an annuity is the death of your pension, as once you have taken an annuity in most instances, if you die, only 50% will be paid to your spouse. I.e. on your death, your annuity payments will halve!
Transfer Upon Death
A QROPS does not die when the holder dies.The entire remaining amount can be passed on to the beneficiary. You may not need to pay a UK tax charge upon death. We will answer all your questions about how to transfer your UK funds abroad with QROPS Pension Scheme.
Lifetime Allowance Charge
Another one of the pension benefits is that you are exempt for Lifetime Allowance Charges and any other penalty from breaching the threshold. However, there is a Lifetime Allowance Charge in transferring funds. If you have a large transfer and are considering moving it, this is something you must discuss with your adviser. If you are living outside the United Kingdom or you are planning to live outside the UK for more than five years, then a foreign plan will be greatly beneficial to you.However, if you are planning to stay out of the UK for less than five years then it might not be wise to take a QROPS as the charges could be much more than the benefits.
What You Can Invest In A QROPS?
You will need to recognise the manner in which assets are handled, such as liquidation of assets prior to transferral, purchasing a residential property, and the transfer of assets upon death.
Here are a few things you need to know about the assets transfer.
Liquidation Of Assets
Not all schemes are the same and each one has its own conditions. When it comes to liquidation of assets prior to taking a QROPS scheme, again the same factors are in play. Each assets transfer is different from the other and it depends on the particular scheme you are taking whether you need to have your assets liquidated before.
- If the pension scheme you hold is either a SIPP or SSAS, then it might be possible to transfer all the existing assets to a scheme without liquidating the assets. Again this depends on the particular QROPS scheme you are taking.
- For most of the other schemes, you will have to liquidate your assets before you transfer to a QROPS scheme.
- Some plans will require your assets to be liquidated before taking a QROPS and they will only transfer cash, while others are more flexible and will allow you to transfer without liquidating your assets.
Purchasing A Residential Property
One of the questions that are commonly asked when transferring is whether the individual can purchase a residential property.
There are a couple of factors that determine whether you can purchase a residential property. Some of the factors are:
- How long you have been living outside the United Kingdom
- Have you been a UK resident any time during the last 5 tax years?
- Are you purchasing a property is possible through an offshore company
Purchasing a property with a QROPS is possible depending on how many years you have been residing outside the United Kingdom. If you have returned to the UK and have been a UK resident any time during the last five (5) tax years then UK pension rules will apply to you and you will not be able to hold a property in the scheme. After five (5) tax years, your scheme will be subject to the chosen jurisdiction. You may be able to purchase a residential property at this time; however, it will be only through an offshore company, which adds another layer of fees.
Extra Pension Benefits May Include
- An annuity to your spouse or dependants
- Payment of your proceeds to a new plan for named beneficiaries
- Retention and distribution of your plan at predefined date (within 2 years of death)
- Pension benefits often include closing your plan and payment to your estate or named beneficiaries.
What’s Your Next Step?
We’re at the end of our QROPS Pension Benefits article, and I hope you’ve found value in it. I can’t say if a foreign plan is a good or a bad decision in your situation, and you’d need to speak to an accredited adviser for this. My goal was only to help you understand a little more about a offshore plans. Hopefully you found it interesting!