Where now for QROPS?

Ken Wrench discusses how demand for QROPS will evolve following the introduction of capped and flexible drawdown.

QROPS have come a long way since 6 April 2006 when they were introduced as part of the A-Day reforms and as a means for the government to comply with EU rules allowing free movement of trade and services.

Five years on, QROPS continue to be an attractive option for high net worth individuals who wish to retire abroad and retain maximum control and flexibility over their pension fund. With the introduction of capped and flexible drawdown from April, there have been suggestions that QROPS will appear less attractive to high net worth individuals.

We don't believe this will be the case. On the contrary, the considerable advantages of QROPS remain intact and are as significant as they were prior to the introduction of capped and flexible drawdown.

For expats who have been living outside of the UK for more than five years, QROPS confer extended benefits.

Income benefits

One of its major advantages is that income can be paid gross in certain jurisdictions. This enables clients living in jurisdictions that do not have double taxation agreements with the UK to be taxed at the rate of their country of residence.

This means that an individual, who has built up a pension fund in the UK and benefited from 40% tax relief during the accumulation phase, can arrange to have their income payments made under a QROPS in the tax regime of their domicile, which could be significantly lower than that applicable to benefits paid by a UK-resident pension scheme.

Furthermore, for scheme holders living overseas, pension benefits from a QROPS can be paid in the currency of the country where they are residing, eliminating costly currency conversion charges which would apply on benefits being paid in sterling from a UK pension scheme. In addition, investments can be held in that currency as well, which can mitigate currency risk.

In addition, once the client has been a non-UK resident for at least five years, QROPS are not subject to UK GAD rates. That means at this point, there is greater flexibility for drawing pension benefits under a QROPS arrangement.
I think it should be added here that while the review and amendments to the UK pension rules have given high net worth clients greater flexibility in their pension choices, it is important to remember that withdrawing money under flexible drawdown takes it from a tax-free environment into a taxable one.

On death rules

Perhaps the most significant of the differences between capped/flexible drawdown arrangements and QROPS lies in the treatment of funds on death. UK-domiciled schemes will be subject to a 55% tax charge on the residual fund on death, unless the fund is bequeathed to a charity.

By contrast, under QROPS, where the member has been non-resident in the UK for five years or more, the whole of the residual pension fund on death can be passed on to the member's beneficiaries.

This has obvious attractions for anyone who has spent their life accruing their wealth and who wants their beneficiaries to be the ones who receive their residual wealth after they are gone.

For those who have worked in a number of countries during their career, QROPS enable such individuals to consolidate all their pension pots under one roof.
This not only simplifies tax and administration, it also allows individuals to amalgamate their pension pots under a tax regime of their choice and in a currency that suits their requirements in retirement.

Another factor to consider, is that whereas some overseas pensions do not allow the retiree to take a capital sum from their pension, the 25% lump sum payment available to UK pension scheme holders can also be made under QROPS. In some cases, up to 30% may be allowed.

From this, it can be seen that the benefits of QROPS can be quite significant. Nevertheless, there are caveats. QROPS are an evolving market and HMRC guidelines have been open to interpretation.

Some argue that QROPS are likely to be subject to tighter regulation in the future. In the meantime, QROPS can provide substantial benefits to high net worth clients who are planning to work or retire abroad.

Ken Wrench is CEO of London & Colonial