Many people ask what the options are when it comes to their UK pensions. The issue, when it comes to UK pensions, is always the intense lack of flexibility, which is always desirable, but it becomes imperative when you leave your home country, as financial planning always becomes a little more sophisticated when living abroad. So what are the options?
Up until fairly recently, the options have been few. One of the most popular options has been to use a Self Invested Personal Pension Plan (SIPP). This gives a fair amount of flexibility to the investor, however only in the shorter term, as most of the main advantages end at age 75. But until then, what are the advantages?
One advantage is that the income can come in the form of “drawdown”, and not a regular income or an annuity, allowing you to decide how much income you get (within strict limits) and when. This facility offers great financial planning opportunities in France for reducing taxation.
Another advantage is that you can choose how the money is invested and can manage the underlying funds to be in any currency you choose, although this is no great advantage if you always have to switch it back into Sterling to drawdown the money.
The main problem with a SIPP is that all the advantages stop at the age of 75. This is because at 75 it is obligatory to purchase an annuity.
This means other advantages, such as the fund being able to be passed to your heirs, also ends.
Thus a SIPPS is a short term solution and clearly not pension utopia, so what else is there?
What is a QROPS Pension?
Since 6th April 2006, there has been the option, as a non resident of the UK, to move a UK pension out of the UK into a scheme known as a QROPS (Qualifying Recognised Offshore Pension Scheme). Although it has been in existence since April 2006 it is still a very under developed market and many large well known companies have avoided getting involved. This fact alone may already be setting your alarm bells ringing.
Creating a QROPS involves moving your pension, potentially anywhere in the world, to a jurisdiction that is authorised by the HMRC in the UK.
So what are the advantages of a QROPS?
So, what are the advantages of a QROPS pension?
- You do not have to take an annuity at retirement age or by 75. This means that, on death, the fund can be left to your chosen beneficiaries
- It is “possible”, after five years, to take all the pension fund as cash
- You can have a pension in the same currency as your new home country
- Greater flexibility as to what you can invest in
- No limit on the amount that can be held within a QROPS scheme
- So the answer overall is greater and permanent flexibility!
This all makes a QROPS sound like a wonderful solution, a pension solution with all the advantages of a SIPP and none of the disadvantages. It certainly could be an ideal solution for many people; however, this, in our opinion, is not yet the case. Over two years after its inception, there are still many concerns surrounding the QROPS.
What are the disadvantages of a QROPS?
Indeed there have already been problems with QROPS pensions and some of these schemes have been closed down. Singapore has been disqualified altogether by the HMRC, causing enormous problems for those who have invested there. Schemes in the Isle of Man have been double taxed as local rules have caused an 18% tax charge on withdrawals. These problems have come about as a result of some companies acting too quickly to jump on the bandwagon, without carefully studying the structure they are using and not considering the possible consequences.
Some of the main concerns are that the rules are still open to misinterpretation and change. You might imagine that the word qualifying means it would be treated as a UK pension, but the fact is the pension would not actually be in the UK. There has been no official comment from the French tax authorities as to how a QROPS would be treated in the hands of a French resident. It is likely that treatment will be on a case by case basis i.e. that if it is a Luxembourg based QROPS, the question will be how do we treat a Luxembourg pension?
Obviously any income drawn down would be assessable to French income tax, but what if your pension funds became subject to wealth tax, for example? Clearly this could make a significant difference to your tax position. Of course, one could always merely declare it as a pension on your income tax return and not declare it for wealth tax and hope the French tax authorities never ask questions. Good financial planning is based on certainty as far as it can possibly be and tax issues should never be left to hope.
The general consensus from many experts is that a European Union based QROPS is more likely to be accepted as a pension than one based outside the EU, but again this is unclear. Jurisdictions such as Guernsey are in Europe but are not part of the EU, furthering the complication.
One of the possible advantages is that you can potentially take out all your money after five years. In fact to do this is against HMRC rules, however, the HMRC are currently stating that there will be no need for a QROPS scheme to report its activities to them after five years. It must be very clear that full access after five years is not a QROPS condition and there is no rule that states you can have your pension as cash after five years!
The problem with this is that some experts have aired concerns that the five year reporting period to the HMRC could be changed retrospectively and at any time, causing those who have broken HMRC rules to be very heavily penalised.
We would always recommend caution here and would always recommend sticking to HMRC rules even after the five years and would prefer to use a like-minded QROPS provider. This is because:
- Following HMRC guidelines, you will never run into any problems with the HMRC no matter what happens to the rules
- You still have all the other listed advantages of the QROPS scheme, such as the control, flexibility and currency
- If it is already well invested why go to the expense and trouble of moving it to another investment?
- It is simply not good planning to just spend all your pension and doing so should not be seen as desirable
Interestingly and somewhat worryingly, when you sign up to a QROPS you have to sign a declaration stating that you understand and agree that you are giving up all security and protection! This is not a very reassuring statement for your life savings.
This means whatever jurisdiction you are moving the money to, needs to be very well regulated and should offer you at least the same protection as that offered to you by the UK.
This is a major issue for us because; as yet, there is no provider that matches our demanding criteria for security, reasonable costing and investment choice. They are often based in jurisdictions where we would never recommend anyone place their life savings and often by companies you are likely to have never heard of.
We are not saying that all QROPS schemes are bad, far from it. What we are merely saying is that the schemes we have come across to date do not meet our, admittedly demanding, criteria.
The only reason for rushing into a QROPS is because it is possible that this scheme may be withdrawn at any point. This is a valid argument because, as the result of this scheme, a large amount of money is leaving the UK and the treasury losing billions in tax revenue. This argument is being used as a pressure point by advisers willing to worry people into taking quick and drastic action, lest they lose out.
We would very strongly recommend against rushing into such a scheme purely for the reason that it might not be available tomorrow.
We are currently talking to large, well established institutions that are looking into establishing QROPS schemes that meet our criteria. They are taking their time, not because they are dragging their feet, but because they are making sure that everything is set up correctly and that there are no possible problems for future investors. These schemes should be available shortly, but in the mean time we would advise extreme caution in relation to QROPS schemes, as many people have already got far more than they bargained for.