Pensions update – The new and shrinking landscape of QROPS, part 2

Pension income (income drawdown) levels

Since my last update there has been several new QROPS Trusts launched in the market place, as well as several generic developments within the world of pensions, courtesy of HMRC, that will have an impact on QROPS going forward.

Therefore, I will break this Update down into subsections to enable you to read what you believe is pertinent to you.

To start with, in the Autumn Statement, the UK Chancellor bowed to public pressure with the reinstatement of the 120% rate with regards to maximum GAD rates when calculating income drawdown, up from the 100% it had been reduced to previously.

However, the HMRC guidelines on income drawdown from QROPS has always been ambiguous, merely stating that the income should not exceed “published annuity rates”.  Most of the industry has always taken this to mean the aforementioned GAD (Government Actuaries Department) rates, not wishing to ruffle HMRC’s feathers.

However, at least 1 scheme in New Zealand is offering far higher drawdown rates than this, as does the Isle of Man, albeit taxed at 20% under Manx law, making the IOM jurisdiction unattractive to most expatriates.  Therefore at my request Brooklands Pensions, who have a very reasonable NZ QROPS offering, are taking this matter up with HMRC and we hope to have clarification on this shortly.

Potential taxation of pension funds on transfer

The Autumn Statement also revealed that the Lifetime Allowance would be reduced to £1.25 million from April 2014.  Although the chancellor said in his statement that only 2% of pensioners currently have a retirement fund above £1.25m, many clients may now have to take serious note of this reduction from the current Lifetime Allowance level of £1.5m.

For example, a pension scheme member aged 40 today, with a fund valued at £600k, only requires net growth of 5% per annum in their fund to find them self with a pension fund of £1.25m by age 55.

Transfer into a QROPS is a benefit crystallisation event (BCE8) and so long as the value of the transfer is below the LTA at that time, there will be no LTA charge levied on the fund. If the transfer is above the LTA, the excess is taxed at 25%, however.

Potential taxation of pension income and use of the Nil Rate Band

Remember that a UK pension is UK source income and therefore you have the Nil Rate Band allowance before you start to pay tax.  Most expatriates with a UK pension fund will also qualify for a UK State Pension; this will use up a fair chunk of the Nil Rate Band and also the State Pension cannot be transferred to a QROPS.

However, for expatriates who do not have a UK state pension and their UK Company/Personal pension fund is relatively small, there may be few advantages and a few disadvantages in transferring to a QROPS, especially if they have no dependents to leave the residual value to on death.

In such instances it may be better to leave it where it is or transfer to a Small Self Invested Pension Scheme (SSIP). As always, each case should be looked at separately.

As stated, however, most holders of UK pensions will also have a State Pension due at retirement age.  You will require 30 qualifying years (30 years where National Insurance contributions have been paid) to achieve a full basic State Pension.  You can make up for a shortfall in your contributions, however, by paying voluntary Class 3 National Insurance Contributions.  For example, I only have 21 qualifying years, a shortfall of 9 years, that I intend to start addressing 9 years before my State retirement age of 66.

When I enquired about my State Pension 18 months ago you could also go back 6 years to make up unpaid contributions, clearly, every expatriates situation will be different.  Therefore to obtain a State Pension Forecast you should contact https://www.gov.uk/future-pension-centre, telephone +44 (0)191 218 3600 from overseas, with your national Insurance number to hand and you will find them very helpful.

UK draft finance bill

This year the Overview of Legislation in Draft, as the Draft Finance Bill is formally known, appears to do little more than add a few new reporting requirements to QROPS, including an obligation for all QROP scheme administrators to notify HMRC that their scheme continues to meet the conditions to be a QROPS.

Jurisdictional pros and cons

With different jurisdictions now having different methods of taxing pensions and therefore QROPS payments from these jurisdictions, clearly care must be taken in where a UK pension is transferred to; the chosen retirement destination of the individual having a big influence on this.  This has come about as a result of last April’s legislation, in particular what became known as “Condition 4”, which stated that members of QROP schemes would not be permitted to enjoy a different tax treatment on their pension payments than that available to pensioners resident in the country in which the scheme was domiciled.

Therefore, here is a brief summary of each of the currently available preferred jurisdictions for people retiring in South East Asia.

Gibraltar

After 3 years of negotiations with HMRC, Gibraltar has emerged as a front runner with a nominal 2.5% local income tax rate on QROPS income, placating the UK taxman and also removing the requirement for Double Taxation Treaties (DTT) with other countries.  Being a fully EU compliant jurisdiction it is regulated by the Gibraltar Association of Pension Fund Administrators (GAPFA), who released their own QROPS Code of Conduct in October 2012, a sensible level of compliance making this a very attractive jurisdiction.

Gibraltar “Lite” schemes

There are also now 2 low cost options for the transfer of pension funds under £100,000 GBP in value, with the castle Trust Groups offering of incredibly low fees of just £299 per annum being the front runner on price.  The Sovereign QROPS “Lite” Trust charges £500 per annum but also offers free transfers to their Malta QROPS.  However, at time of writing the Malta DTT with Thailand is still being negotiated.

Malta

The Malta Financial Services Authority (MFSA) is a heavily regulated and therefore slow moving regulatory body with a lot of DTT’s in place.  At time of writing the first test cases are going through the MFSA to establish what they require under their “proof of residency” requirements for paying out pension income gross.  Malta reserves the right to withhold up to 35% income tax on pension payments to other jurisdictions if their proof of residency requirements are not met.

New Zealand

A long established QROPS provider, New Zealand has the potential to offer a higher level of income (see pension income above) but investment fund choice is limited in this jurisdiction.  There is a very attractive zero percent income tax stopped at source; however, regardless of DTT’s, that are contained in the second attachment along with their Tax Information Exchange Agreements.

Isle of Man

Not suitable for anyone wishing to draw an income from their QROPS due to a 20% tax rate.

Guernsey

Closed to new expatriate business from April 2012.

Mauritius

After new pension legislation was introduced by the Mauritius Financial Services Commission last month, I am liaising with Pension Administrators here who believe they will have a QROPS offering similar to Gibraltar in the first quarter of 2013.  A dark horse but do not hold your breath waiting for the QROPS approval…