In our last article on UK private pension liberalisation, we looked at schemes in the UK and how they are affected by the latest government regulations. From April 6, 2015, any private pension scheme held in the UK may be liquidated and the entire pot withdrawn. While this is a very attractive option for many, the reality is that income tax will be levied on these proceeds at the individual’s marginal tax rate for that year. As a consequence, taking the pot in one go will not be as tax-efficient as taking staged drawdowns each year, or as required.
Any individual with a defined benefit scheme (DBS) will be limited in what he or she can do because the long-term benefit value of such schemes is higher to most members than that of defined contribution schemes (DCS). A DBS will pay a pension income related to your salary and years of service, with annual increments for inflation, whereas a DCS simply offers you a pension pot to invest and create an income, leaving you reliant on market forces.
Defined benefit schemes funded by the government will be locked and totally inflexible from April 2015. You will not be able to transfer any DBS to any qualified recognised overseas pension scheme (QROPS).
QROPS were introduced in 2006 on pension “A Day” in the UK. The spirit of QROPS was to allow any person who had worked in the UK to “export” a pension scheme to a place that was more appropriate to individual circumstances.
Leaving the schemes in the UK was seen as inappropriate for residents of other countries, since they would be subject to UK tax on the benefits paid. They would also be limited in terms of the entitlement age and amount of benefits; restricted as to who may be a beneficiary after they died (with remaining benefits subject to UK inheritance and death taxes); have no control over how the underlying investment was invested; be tied to benefits in British pounds, and have no say in how currencies were managed.
QROPS were thus a blessing to many British and foreign nationals who had worked in the UK and held deferred pension benefits in that country. The legislation allowed them to export their pensions and obtain much more flexibility, even though there were still UK guidelines that had to be followed.
The advantages were overwhelming for expats, starting with not having to pay UK income tax. Having the option to control one’s own pension investments was also very appealing. Onshore UK pension schemes and offshore personal pension arrangements are very different in nature.
Then there was the freedom to nominate heirs and successors rather than only a spouse with very limited benefit availability. A QROPS allows children and any other person considered worthy to be named as beneficiaries. It also shields succession benefits from UK inheritance tax and death tax.
Now that UK pension liberalisation has been announced, where does this leave QROPS? Both existing scheme members and potential transferees need to carefully evaluate their situations.
Her Majesty’s Revenue and Customs (HMRC) has been adamant that benefits paid under QROPS follow the basic principle that investments be used for providing a pension to people during their retirement. As well, benefits paid to members are to be taxed in the same way as those paid to local residents of the country where a QROPS is held.
These two “golden rules” were developed to protect schemes from abuse and stop “pension busting”: the practice of transferring a UK scheme to a QROPS and then liquidating and paying the entire capital to the member. Schemes were developed along these lines to help people skirt the rules.
As with many things in life, the greedy few ended up spoiling things for the honest majority. The rules surrounding QROPS have thus been tightened to eradicate those who were taking advantage of loopholes and violating the spirit of the entire programme.
Jurisdictions that have survived by adapting their rules to accommodate HMRC requirements now find themselves having to ensure they will continue to fit the intention of QROPS in principle and practice. Many people who have been considering a QROPS now question whether there are any advantages left. Existing members also need reassurances about their status. This is largely because once the UK government announced pension liberation, they then needed to turn to the QROPS world to ascertain how these schemes would work in UK terms.
Some are saying that the advantages of QROPS have been eroded in light of changes made in the UK. These include the negation of inheritance tax and death taxes on pension pots before members reach age 75 or take benefits. In some ways this is seen as unfair because the life expectancy of the majority in the UK is more than 75. Thus some sort of death tax would be expected if you survive beyond 75.
Some say the UK government has made a sweeping change in its own favour. The liberation of all pensions will surely be a good vote catcher in the general election later this year. These changes will also create a significant increase in tax revenue for the government over the next few years because those who do cash their pension pots will pay tax on 75% of the proceeds. The initial 25% is paid free of any income tax.
A number of announcements have been made lately by most popular QROPS jurisdictions to align them with UK regulations. These include the fact that entire pension pots can be liquidated and drawn. This begs the question of how the proceeds may be taxed in these countries. If the proceeds are taxed as pension income, Gibraltar looks like a popular place to be as tax there is a mere 2.5% on such income. However, if the choice is Malta the tax is substantial, and unless there is a double-taxation agreement with the country where you live, there will be a significant chunk paid in tax. There is no double-taxation agreement between Malta and Thailand as yet.
On the positive side, the succession planning and death tax advantages of a QROPS remain valid, and certainly the investment management and currency choices give the holder a significant edge.
So, if you think you may be in the market for a QROPS, it is still well worth considering, but make sure you receive sound advice. If you have a UK government-funded defined benefit scheme and want to consider the QROPS option, you had better get your skates on because the door closes on April 5 this year. n
Andrew Wood has been an expat in Asia for 35 years and is executive director with PFS International. He has been writing Net Worth articles for seven years and has made a significant contribution to the PFS library of financial service articles dating back over 10 years. These articles, which cover the complete A-Z of financial planning, are available to readers on request. Questions to the author can be directed to PFS International on 02-653-1971 or emailed to enquiriesthailand@fsplatinum.com.