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1. Portability and Flexibility
One of the fundamental benefits of a QROPS is their flexibility. If you are an expat with no intention of returning to the UK you cannot afford to ignore the benefits that a QROPS can offer.
Not only are they a great way to manage pension assets that have been built up throughout your life, they also allow for greater portability should your circumstances change.
QROPS are designed with the expat community specifically in mind and are able to provide retirement benefits wherever you reside.
2. Consolidation
QROPS are a great way to consolidate all of your pensions into one policy. This makes the administration and investment management much more efficient. You are able to monitor and make strategic alterations to your pension fund with relative ease, thus benefiting from opportunities while being able to protect yourself against any potential market crashes.
3. Maximising a spouse’s pension
Pension provision for a spouse in the event of your death, is an issue that will concern many.
However, with a QROPS it is in fact possible for up to 100% of the fund to provide a spouses pension, via an annuity or income drawdown arrangement.
A final salary scheme transferred to a QROPS will allow for the pension asset to provide a better and more substantial retirement income for your partner.
4. Avoid the falling Lifetime Allowance
The LTA has reduced in real terms ever since 2010/11, with the current LTA set at £1,250,000.
The issue with a lower LTA threshold is that whenever it is exceeded, the excess amount is taxed at 55%, thus making the system extremely tax-inefficient for a pension holder who may exceed the LTA.
When you transfer a UK pension to a QROPS, the value is tested against the LTA at that point. This makes any future growth outside the scope of the LTA and its harsh tax measures.
This represents a very real benefit and reason to transfer to a QROPS, before the threshold becomes even lower.
5. Benefit from worldwide investment options
A QROPS is able to access a huge range of investment funds based on a number of differing currencies. The plethora of funds available, allow for increased diversification while enabling the investor to create a portfolio tailored to their specific needs.
6. Income taxed in country of residence
Generally, a UK pension is paid out net of basic-rate tax. PAYE applies to all pensions from registered pension schemes.
However, a non-UK tax resident is in a position to have their pension payment paid out gross by completing the relevant HMRC form (depending on the relevant tax treaties of the country of residence).
The greater flexibility of a QROPS means that you can transfer to a jurisdiction that pays out gross income, or has flexible income tax provisions.
7. Final salary schemes
A final salary scheme was once one of the most generous and secure pension arrangements (assuming the employer remains solvent).
However, the generosity of final salary schemes has seen many disappear in recent years due to them being so expensive for the employer to provide and operate.
If you are part of a final salary pension scheme, the main benefit of transferring to a QROPS include:
- Increased assurance that your retirement income will be safe. The aforementioned expense of these schemes, mean their future ability to provide benefits has been jeopardised. If a pension scheme collapses, the UK Pension Protection Fund (PPF) may honour the benefits so long as the PPF can itself take on the burden.
- If you have a large pension, then the amount you are able to leave for your beneficiaries will often be a priority. If you are a deferred member of a final salary scheme, (and you don’t have a spouse or dependant) your pension income will die with you. However, by transferring to a QROPS you will be in a position to pass on a lump sum death benefit to a beneficiary of your choosing.
- Another little known fact is that many final salary pension schemes reduce benefits available to a spouse if they are more than 10 years younger than the deceased member.
8. On going advice on your pension assets
Seeking continued advice on your pension assets is an important factor if you aim to maximise your retirement income.
If you leave your assets in a frozen UK pension arrangement, with out the relevant advice you could end up being affected in the following ways:
- The detrimental impact of alterations to UK Pensions legislation. If you are not in a position to react to certain developments, you retirement funds could be damaged, reducing your lifetime allowance.
- If you hold a UK SIPP, personal or group pension plan, you need to be aware where the money is being invested. This is essential if you want to see the pension continue to grow, while keeping pace with inflation. Conversely, if the SIPP is performing badly you will want to be aware of this.
By transferring your pensions to a QROPS you are essentially bringing your assets under one umbrella, thus allowing you dealings with one advisor who will be monitoring the pension and is aware of local tax/pension rules in the relevant jurisdiction.
9. Minimise Exchange rate risk
Exchange rates between Stirling and the Euro, (or Swiss Franc if you are deciding to retire there) are constantly shifting. As such, the real time value of your UK pension can be at the mercy of fluctuating currency value.
For example, the Swiss Franc saw an appreciation of almost 35% against the pound between 2003 and 2013. For those unlucky enough to be resident in Switzerland, holding a UK pension scheme would have meant a huge fall in potential retirement income.
However, by using a QROPS to pay out income and use Swiss Franc denominated assets would have helped manage this risk.
No matter where you decide to retire, a QROPS can be used so that a portfolio of currencies forms part of the investment allocation. The general advice is that investors should have their retirement income paid out in the currency of the country they live.
10. Breaking away from UK Pension Legislation
The UK Government has clamped down on pension members’ ability to shelter tax through the use of pensions in recent years. This has been achieved through the reduction in the annual amount that can be contributed to pensions, while obtaining significant tax relief.
The allowance has in fact fallen from £255,000 per annum in 2010/11 to only £40,000 for the 2014/15 tax year.
A new term for Tax Free Cash (TFC) has also been introduced, with it now being called ‘Pension Commencement Lump Sum’ (PCLS). PCLC’s are now taxable in part in the event that a pension member exceeds the LTA. (See point 4 above.)
All of these developments make it clear that HMRC is trying to limit the tax efficiency of pensions, thus making the move to a QROPS even more beneficial.
