By Chris Leanindustry insights

44 OCTOBER 2013 - MARCH 2014

Thorough Analysis of QROPS Crucial

During Retirement PlanningExpatriates who are looking to QROPS as retirement planning vehicles should do

well to conduct a thorough analysis of the scheme to ensure their suitability.

OCTOBER 2013 - MARCH 2014 45 Important: See Disclaimer on Page 5

Christopher Lean, BA (Hons) APFS

Christopher Lean is a British national living in the Czech Republic. He started his career in the finance indus-try as an IFA in 1990 with a UK national employee benefits consultancy, and he worked for the IFA division of UHY Hacker Young Chartered Accountants before leaving the UK. While in the UK, he was a Chartered Insurance Institute examiner and an FSA-registered pension transfer specialist. He is a Business Studies graduate and an Associate of the Personal Finance Society in the UK.

Nowadays, it is quite impossi-ble not to see advertisements for QROPS (Qualifying Rec-

ognised Overseas Pension Schemes) online, or join an expats forum with-out seeing a number of threads on the subject.

The current QROPS rules came into place in 2006. However, these were not the only rules that were created at that time. The 2006 ‘A’ Day rules made con-siderable changes to policies relating to UK pension, in an attempt to simplify the rules going forward. This extra layer of apparent “simplification” has resulted in a complex scenario for ex-pats that have UK pension plans prior to the ‘A’ Day.

The issue I wish to discuss here is that of expats with UK pensions that are held in Occupational Money Purchase schemes (i.e. an individual fund that moves with market conditions, as op-posed to a final salary scheme that de-livers defined benefits dependent upon the scheme’s rules). These schemes, set up before 2006, were covered by several sets of occupational pension scheme rules, and not under personal pension plan rules. The rules for QROPS and these schemes clearly interact when it comes to cash lump sums at retirement.

There are many hundreds of thou-sands of people with paid up (no longer actively contributing) Occupa-tional Money Purchase Schemes, and of course, a proportion of these will be long-term expats.

WHICH SCHEMES ARE COvERED? • CIMPS/COMPS (Contracted In/

Out Money Purchase Schemes)• EPP and SSAS (Executive Pension

Plans and Small Self Administered Schemes)

• Section 32 (A “personal” fund that has been transferred from an occu-pational pension, but is still treated as an occupational scheme)

The new post-2006 rules limit the amount of cash that can be with-drawn from any UK pensions to 25% of the fund (final salary schemes need to apply a special calculation). Whilst this limitation is often mentioned in QROPS articles and advertisements, the “Scheme Specific Tax Free Cash Protection Rules” are almost never mentioned. I believe that this is an area that needs to be highlighted.

I quote directly from HMRC (HM Revenue & Customs) guidance notes

to help explain one of the rules. There are a number of protection rules but it is likely that expats who have such pension benefits, will be affected by the scheme-specific rules. The other rules, including new rules to be introduced in 2014, will not be covered in this article.

First of all, the HMRC states that “If you were a member of an occupa-tional pension scheme before 6 April 2006 you may have had the right to a tax-free lump sum of more than 25 per cent of the value of the funds in your pension scheme.”

HMRC goes on to say, “You may not know if you have scheme specific lump sum protection. You did not have to apply for this type of protection. The tax legislation gave you protection if you: • were a member of an occupation-

al pension scheme before 6 April 2006, and

• your scheme rules allowed you to take a tax-free lump sum of more than 25 per cent of the value of your funds in the scheme.”

Whilst these rules are protected by legislation (there are separate rules for Primary and Enhanced Protection), the rules do not protect this higher lump

Important: See Disclaimer on Page 5

46 OCTOBER 2013 - MARCH 2014

A QNUPS is a Qualifying Non-UK Pension Scheme. However, it is not a product but more of a set of rules established by HMRC (Her Majesty’s Revenue and Cus-toms) in the UK.

sum entitlement if the pension is trans-ferred to an individual personal pen-sion or a QROPS. At that point, the lump sum will be limited to 25% or 30% respectively (in most jurisdictions).

Expats that have benefits in an oc-cupational scheme and would like the option to have more than 30% (QROPS rules) of the fund as a lump sum at re-tirement, will need to make sure that they get an appropriately qualified pension specialist to calculate the pro-tected lump sum. This must be done before a transfer to a QROPS is even considered.

The calculations are rather compli-cated as they cover a number of differ-

ent pension regimes from before 1987 and up to 2006.

As an example, the pre-1987 rules allow 1.5 times the salary (at date of leaving) as a lump sum at retirement, in this case subject to 20 years service.

If this calculation is equal to or larger than the fund amount, then the member can draw the whole lot as a stand-alone lump sum (As per Arti-cles 25 - 25D The Taxation of Pension Schemes (Transitional Provisions) Or-der 2006 - SI 2006/572).

So, if the total lump sum rights as at 5 April 2006 are equal to the total pension rights, then the protected per-centage is 100%. This is referred to as

the “stand-alone” lump sum. There is no requirement for a stand-alone lump sum to be linked to an arising entitle-ment to a pension from the same pen-sion scheme.

From 6 April 2011 onwards, the stand-alone lump sums can be paid to those over 75 as well as those under 75.

As the saying goes, “look before you leap”, while there are many rea-sons why expats would benefit from a QROPS, a full analysis of the existing UK pension must be undertaken before a transfer, in the event that the existing scheme may be the right choice of re-tirement planning vehicle after all! iGP

Qualifying Non-UK Pension Scheme (QNUPS) – A tax planning solution for wealthy expats

OCTOBER 2013 - MARCH 2014 47 Important: See Disclaimer on Page 5

Since a QNUPS is not deemed to be a product, it must surely be a set of rules that require advice from advis-ers that have clients who could potentially benefit from a QNUPS.

There are similarities between QNUPS and QROPS (Qualifying Recognised Overseas Pension Scheme), but while a QROPS can be a QNUPS, a QNUPS is not neces-sarily a QROPS.

QNUPS, by definition, must be treated as if they are a pension scheme for retirement planning. So, what are some of the key features?• No limit on contributions• Tax-free growth within the fund• Access to income from the age of 55• 70% of the fund must be used to provide an income

and 30% may be taken as a lump sum and not taxed by HMRC

• The trustees must be based outside of the UK• Wide range of investment possibilities• No obligation to report to HMRC, though any in-

come should be reported to the local tax authorities• Funds are exempt from UK Inheritance Tax (IHT) as

per HMRC Regulations 2010 [SI 2010/0051]

WHO MIgHT BEnEfIT fROM A QnUPS?Typically, a reasonably well-off and wealthy UK-domi-ciled individual that is:a. Non-UK resident who cannot contribute to a UK

pension and receive tax relief on contributionsb. A UK resident that has maximised all UK pension

allowances for annual contributions and/or is likely to exceed the UK pension lifetime allowance that will tax individual pension funds larger than £ 1.25 million

In both cases, if the individuals have a liability to IHT, there are some additional IHT planning opportuni-ties. This is because any contribution to a QNUPS will be treated as being immediately outside of the individual’s taxable estate for IHT.

Normally, the placing of large sums into a trust struc-ture, for IHT planning, would require the passing of 7 years to be fully IHT effective (different trusts have dif-ferent rules and this is a generalisation) .

On the point related to “no limit on contributions“, HMRC have made it clear that these schemes are not to be used solely for IHT mitigation or a tax avoidance tool. The contributions to the schemes should be well within

the individual’s means and not affect the ongoing stand-ard of living. So, although there is no defined limit to contributions to a QNUPS, HMRC may look to assess whether the contribution was solely to avoid IHT and not to be used for legitimate pension planning.

Clearly, for those who can afford to make contribu-tions to a QNUPS, the tax-free growth and IHT savings for UK domiciles make this a concept that should be part of any adviser’s adviced-based solution. The protection of an income in retirement and wealth protection ben-efits are clear.

RETURnIng TO THE UKMembers of QNUPS that return to the UK, as well as those that were already UK resident, can continue to make contributions to a QNUPS. Of course, for UK resi-dents, it may be better to first consider the options to re-ceive tax relief on UK pensions before making additional contributions to a QNUPS. The fund, upon death, will still not be assessed for IHT.

While there are considerable investment options within a QNUPS, care should be taken if the funds are placed into an insurance company investment bond if the investor plans to return to the UK. Many of these investment bonds are “personalised” (this would be the subject of another article about the taxation of Personal-ised Portfolio Bonds for UK residents and returning UK expats). There is a possibility that the bond, although in a tax-free wrapper of a QNUPS, could be subject to “deemed gains” and taxed. Advice on this issue is cru-cially important so that the returning expat is not acci-dentally caught out.

ADvICE BASED SOlUTIOnThe tax and retirement planning opportunities, taken into account an individual’s domicile, residency and fi-nancial goals, make QNUPS a concept that should form part of an adviser’s overall holistic advice-based solu-tion. Of course, part of this advice should also include lo-cal taxation advice that may require additional legal and accountancy input. If you have not heard of or looked at a QNUPS, perhaps it is time to contact your financial adviser.