Graham Macdonald, MBE
MBMG International Ltd.
Nominated for the Lorenzo Natali Prize
Pensions update - The new and shrinking landscape of QROPS, part 2
Pension income (income drawdown) levels
Since my last update there has been several new QROPS Trusts launched in the
market place, as well as several generic developments within the world of
pensions, courtesy of HMRC, that will have an impact on QROPS going forward.
Therefore, I will break this Update down into subsections to enable you to
read what you believe is pertinent to you.
To start with, in the Autumn Statement, the UK Chancellor bowed to public
pressure with the reinstatement of the 120% rate with regards to maximum GAD
rates when calculating income drawdown, up from the 100% it had been reduced
However, the HMRC guidelines on income drawdown from QROPS has always been
ambiguous, merely stating that the income should not exceed “published
annuity rates”. Most of the industry has always taken this to mean the
aforementioned GAD (Government Actuaries Department) rates, not wishing to
ruffle HMRC’s feathers.
However, at least 1 scheme in New Zealand is offering far higher drawdown
rates than this, as does the Isle of Man, albeit taxed at 20% under Manx
law, making the IOM jurisdiction unattractive to most expatriates. Therefore
at my request Brooklands Pensions, who have a very reasonable NZ QROPS
offering, are taking this matter up with HMRC and we hope to have
clarification on this shortly.
Potential taxation of pension funds on transfer
The Autumn Statement also revealed that the Lifetime Allowance
would be reduced to £1.25 million from April 2014. Although the chancellor
said in his statement that only 2% of pensioners currently have a retirement
fund above £1.25m, many clients may now have to take serious note of this
reduction from the current Lifetime Allowance level of £1.5m.
For example, a pension scheme member aged 40 today, with a fund valued at
£600k, only requires net growth of 5% per annum in their fund to find them
self with a pension fund of £1.25m by age 55.
Transfer into a QROPS is a benefit crystallisation event (BCE8) and so long
as the value of the transfer is below the LTA at that time, there will be no
LTA charge levied on the fund. If the transfer is above the LTA, the excess
is taxed at 25%, however.
Potential taxation of pension income and use of the Nil
Remember that a UK pension is UK source income and therefore you
have the Nil Rate Band allowance before you start to pay tax. Most
expatriates with a UK pension fund will also qualify for a UK State Pension;
this will use up a fair chunk of the Nil Rate Band and also the State
Pension cannot be transferred to a QROPS.
However, for expatriates who do not have a UK state pension and their UK
Company/Personal pension fund is relatively small, there may be few
advantages and a few disadvantages in transferring to a QROPS, especially if
they have no dependents to leave the residual value to on death.
In such instances it may be better to leave it where it is or transfer to a
Small Self Invested Pension Scheme (SSIP). As always, each case should be
looked at separately.
As stated, however, most holders of UK pensions will also have a State
Pension due at retirement age. You will require 30 qualifying years (30
years where National Insurance contributions have been paid) to achieve a
full basic State Pension. You can make up for a shortfall in your
contributions, however, by paying voluntary Class 3 National Insurance
Contributions. For example, I only have 21 qualifying years, a shortfall of
9 years, that I intend to start addressing 9 years before my State
retirement age of 66.
When I enquired about my State Pension 18 months ago you could also go back
6 years to make up unpaid contributions, clearly, every expatriates
situation will be different. Therefore to obtain a State Pension Forecast
you should contact https://www.gov.uk/future-pension-centre, telephone +44
(0)191 218 3600 from overseas, with your national Insurance number to hand
and you will find them very helpful.
UK draft finance bill
This year the Overview of Legislation in Draft, as the Draft
Finance Bill is formally known, appears to do little more than add a few new
reporting requirements to QROPS, including an obligation for all QROP scheme
administrators to notify HMRC that their scheme continues to meet the
conditions to be a QROPS.
Jurisdictional pros and cons
With different jurisdictions now having different methods of
taxing pensions and therefore QROPS payments from these jurisdictions,
clearly care must be taken in where a UK pension is transferred to; the
chosen retirement destination of the individual having a big influence on
this. This has come about as a result of last April’s legislation, in
particular what became known as “Condition 4”, which stated that members of
QROP schemes would not be permitted to enjoy a different tax treatment on
their pension payments than that available to pensioners resident in the
country in which the scheme was domiciled.
Therefore, here is a brief summary of each of the currently available
preferred jurisdictions for people retiring in South East Asia.
After 3 years of negotiations with HMRC, Gibraltar has emerged as
a front runner with a nominal 2.5% local income tax rate on QROPS income,
placating the UK taxman and also removing the requirement for Double
Taxation Treaties (DTT) with other countries. Being a fully EU compliant
jurisdiction it is regulated by the Gibraltar Association of Pension Fund
Administrators (GAPFA), who released their own QROPS Code of Conduct in
October 2012, a sensible level of compliance making this a very attractive
Gibraltar “Lite” schemes
There are also now 2 low cost options for the transfer of pension
funds under £100,000 GBP in value, with the castle Trust Groups offering of
incredibly low fees of just £299 per annum being the front runner on price.
The Sovereign QROPS “Lite” Trust charges £500 per annum but also offers free
transfers to their Malta QROPS. However, at time of writing the Malta DTT
with Thailand is still being negotiated.
The Malta Financial Services Authority (MFSA) is a heavily
regulated and therefore slow moving regulatory body with a lot of DTT’s in
place. At time of writing the first test cases are going through the MFSA to
establish what they require under their “proof of residency” requirements
for paying out pension income gross. Malta reserves the right to withhold up
to 35% income tax on pension payments to other jurisdictions if their proof
of residency requirements are not met.
A long established QROPS provider, New Zealand has the potential to offer a
higher level of income (see pension income above) but investment fund choice
is limited in this jurisdiction. There is a very attractive zero percent
income tax stopped at source; however, regardless of DTT’s, that are
contained in the second attachment along with their Tax Information Exchange
Isle of Man
Not suitable for anyone wishing to draw an income from their QROPS due to a
20% tax rate.
Closed to new expatriate business from April 2012.
After new pension legislation was introduced by the Mauritius
Financial Services Commission last month, I am liaising with Pension
Administrators here who believe they will have a QROPS offering similar to
Gibraltar in the first quarter of 2013. A dark horse but do not hold your
breath waiting for the QROPS approval…
The above data and
research was compiled from sources believed to be reliable.
However, neither MBMG International Ltd nor its officers can
accept any liability for any errors or omissions in the above
article nor bear any responsibility for any losses achieved as a
result of any actions taken or not taken as a consequence of
reading the above article. For more information please contact
Graham Macdonald on [email protected]