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Gerard Associates Ltd
Gerard Associates Ltd
Global Wealth Managers and Independent Financial Advisers
QropsOverseas Pension TransfersQrops ChargesUK PensionsQrops FAQ
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Q. & A.

Q: What is a QROPS?

A Qualifying Recognised Overseas Pension Scheme (QROPS) is an overseas pension scheme that Her Majesty’s Revenue & Customs (HMRC) recognises as being eligible to receive an authorised payment in the form of recognised transfer from registered pension schemes in the UK. Simply you can move your Pension fund to another country.

HMRC insists that a QROPS must meet various prescribed conditions, relating to the jurisdiction in which it is established, how it is regulated, and the benefits it pays. The implementation of the UK Pension Simplification in April 2006 brought about the availability of QROPS. This can be attributed to similar EU directives which allow the freedom of European citizens to move and work freely within Europe also allows freedom of movement of Pensions.

To meet these conditions a QROPS needs to fulfil several requirements which are listed at http://www.goforcustomer.co.uk/qrops/technical.htm

All QROPS providers will have a letter from HMRC confirming their QROPS authorisation number.

Q: How do I know if it’s a legitimate scheme?

UK QROPS approved plans that have consented to have their details published are listed on HMRC’ website: http://www.hmrc.gov.uk/PENSIONSCHEMES/qrops-list.htm

This should not be seen as a recommendation and you should always seek advice from a UK Financial Services Authority authorised and regulated firm.

Q: What type of UK Pensions can be transferred to a QROPS?

A QROPS may be used to receive transfer values from any UK registered pension scheme including GMP (guaranteed minimum pensions) or Protected Rights.

Transfer values may be paid to a QROPS from a UK registered pension scheme (other than annuities or secured pensions) even where benefits have been taken (although the transfer of unsecured pension or alternatively secured pension funds need to stay within the UK-authorised payment rules).

For example if there is an existing UK self-invested personal pension scheme where unsecured income is being drawn (“income drawdown”) it may remain beneficial to transfer to a QROPS where the individual is non-UK resident and intends to remain so over the long-term.

There is no limit to the size of funds that may be accumulated within a QROPS. However a transfer from a UK registered pension scheme to a QROPS is considered by the HMRC in the UK as a “benefit crystallisation event” (BCE) and therefore the scheme administrators of the UK registered scheme will be required by HMRC to carry out a test against the individuals lifetime allowance (£1.65 million for the 2008/9 tax year).

However for those with pension schemes which were in existence prior to 6th April 2006, it is possible to apply to HMRC for enhanced protection which permits a sum in excess of the lifetime limit to be used to provide benefits without triggering unauthorised payment charges by the HMRC. Any registration that is advisable for “enhanced protection” should be dealt with before transferring out to a QROPS.

To claim enhanced protection, an individual must notify HMRC in the UK of their intention to rely on this protection. The notification must be made on form APSS 200 - Protection of Existing Rights, which must reach HMRC on or before 5 April 2009.

See HMRC references:
http://www.hmrc.gov.uk/pensionschemes/apss200-notes.pdf page 2 column 2;
http://www.hmrc.gov.uk/manuals/rpsmmanual/attachments/rpsm03104570_flowchart_a.doc

Q: What reporting has the QROPS provider undertaken to provide to the HMRC in the UK?

The provider has undertaken to provide information to HMRC on all benefit payments made from the plan when a member is either:

• Tax resident in the UK at the time the payment is made (or is treated as made), or

• Although not tax resident in the UK, they have been resident in the UK earlier in the tax year in which the payment is made (or is treated as made), or in any of the five tax years immediately preceding that tax year (UK).

Simply when you have been non UK resident for five complete tax years the reporting to HMRC ceases.

Q: What are the practical benefits of transferring to a QROPS?

Assets held within the QROPS plan grow free of taxation (except for any withholding taxes which cannot be reclaimed), in the same way as for UK Plans, and cannot be adversely affected by subsequent changes to UK pensions rules. By far the most quoted beneficial advantage is no requirement to buy an annuity and on death pass the remaining fund to any spouse or beneficiaries.

Q: What is the minimum transfer I can make?

There are no minimums on the transfer values but realistically £25,000 or currency equivalent if no further contributions are to be made.

Q: What is the maximum transfer I can make?

There are currently no limits on the transfer value.

UK Pensions Benefits are generally taxed at source in the UK as earned income, unless a double tax treaty, allows otherwise. By transferring to certain QROPS the member will automatically receive all future benefit payments without deduction of tax. The member will then be responsible for declaring the income in their own country of residence. Note: Some jurisdictions providing QROPS impose withholding tax on income.

There is greater flexibility as to the method and levels of benefit payments which can be made from the QROPS, particularly once the member has been non UK resident for the required period of time (currently 5 complete UK tax years).

Investments within the QROPS and benefits paid can be denominated in any currency but typically, Sterling, Euros or US Dollars to help avoid currency fluctuation risk.

On the death of the member the remaining assets can normally be passed on to beneficiaries, without any liability to UK Inheritance tax. In many jurisdictions the QROPS structure will also not have a liability to succession taxes. Please check the exact circumstances of liability to tax before proceeding. Jurisdictions may have very different tax regimes and liabilities than to the UK.

Q: Who is eligible to transfer to a QROPS?

QROPS are open to anyone who is over 18 years of age and under the age of 75 years.

For individuals who are still UK tax resident they will normally only be permitted do so if they have an intention to become Non-UK tax resident.

Q: What if I return to the UK within 5 years or never manage to be non UK resident?

The QROPS provider will continue to report any capital and income payments until you have been non UK resident for 5 complete tax years. Therefore the QROPS mirrors UK Pensions legislation until you complete the 5 years rule (if ever).

Q: How can benefit be taken?

To meet the QROPS approval requirements, the QROPS Plan needs to provide an income designed to be payable throughout a member’s life. This may be taken in a variety of ways depending on the individual circumstances and advice received. Most QROPS plans are able to facilitate benefits via income drawdown, lump sum payments and annuities.

Q: At what ages can benefits be taken from a QROPS scheme?

There can be considerable flexibility in terms of the timing of taking benefits from a QROPS. If you have been UK resident at any time during the five complete tax years prior to taking benefits then UK provisions apply effectively prohibiting (because of the tax charges that would apply) the taking of benefits before the age of 50 (55 from 6 April 2010).

A member of most QROPS schemes may generally take benefit from age 50 depending on the circumstances prevailing. Generally some benefits should commence by age 75 at the latest.

Any benefits not paid in accordance with UK requirements during this time will be an unauthorised payment. There are a number of tax charges that could apply: the unauthorised payments charge, the unauthorised payments surcharge and the scheme sanction charge.

Whenever an unauthorised payment is made it will be subject to a tax charge at the rate of 40%. The recipient of the payment is liable for this.

The unauthorised payments surcharge must also be paid where the level of unauthorised payments made to or in respect of a member exceeds a certain limit in a year. The limit is exceeded if all unauthorised payments made to or in respect of a member in a period of twelve months amount to 25% or more of the value of that member’s benefits under the scheme. The unauthorised payments surcharge is 15%. This is paid in addition to the unauthorised payments charge of 40%, so in some cases the recipient could face a total tax liability of 55%.

Q: What happens on death after making a QROPS transfer?

Irrespective of whether pension benefits have commenced, if a death benefit payment is made during the 5 year reporting period then the QROPS will need to report the payment in respect of the deceased member. If the payments conform to the Finance Act 2004 pension death benefit/lump sum death benefit rules there will be no unauthorised payments charge (surcharge); otherwise a charge will arise. (Please see the answer to previous references or further information on the tax treatment of unauthorised payments.)

The death benefits actually payable will, of course, depend on the rules of the scheme, but there are a variety of death benefit payments that would conform to the Finance Act 2004. Income payments can only be made to a dependent (generally speaking a spouse or civil partner, a child under the age of 23 and anyone who was financially dependent or interdependent with the member), whilst lump sum death benefits can be paid to a wider range of recipients. Whether or not a lump sum death benefit is taxable depends on the circumstances in which it is paid.

Q: Who can benefit on death of a member?

During the lifetime of a Member they have sole entitlement to the benefits available from their Plan, however after the Member’s death the residual value is available to the Named Beneficiaries.

For non Guernsey Residents the Member’s Named Beneficiary(ies) means the Member’s spouse, his/her dependants or future issue or persons appointed to benefit from the Member’s estate by will.

Q: What succession benefits does the QROPS offer?

Generally this is more flexible than a UK Pension as any residual value can be passed onto the Member’s successor beneficiaries following death. This however does not have to be directly but could be settled into another structure for the beneficiary’s future benefit, i.e. another pension plan or a trust structure and thus not falling directly into the hands of the beneficiary all at once.

Q: Under what circumstances will a member of the QROPS Plan be liable for UK IHT?

The provisions in Finance Bill 2008 will give IHT protection to pension savings which have had UK tax relief and also to funds in QROPS Plans. (Please note that the Finance Bill 2008 is not yet an Act so there is a possibility this may change, although this is unlikely.).

As an overseas discretionary retirement annuity trust, where the trustees are required to exercise their discretion in accordance with deed rules and local law on who can benefit after Member’s death and that any residual assets would not form part of the Member’s estate.

The Trust is outside of the Member’s estate and therefore IHT would not apply (http://www.hmrc.gov.uk/MANUALS/RPSMMANUAL/RPSM04100060.htm ).

Even if an annuity was in payment to a Member then this annuity would still fall outside the later Member’s estate (bullet 4 of RPSM04100060).

It is acknowledged that in all the examples given by HMRC, although IHT would not apply it is possible that the unauthorised payment consequences could occur and the recipient could be subject to an unauthorised payment charge which could be quite considerable, and this charge is only likely to be applicable during the required reporting period (5 year residency rule).

Q: What happens if, prior to transferring to a QROPs, a UK tax resident exceeds the UK lifetime allowance cap (£1.65m in 2008/9) and exceed any enhanced protection?

When benefits under a registered scheme come into payment for any reason, including lump sums payable on death, they must be tested against the lifetime allowance. Any event which results in payment of a benefit is known as a ‘benefit crystallisation event’ (BCE). The benefit crystallisation framework is designed to make sure that the lifetime allowance is applied to the total of an individual’s benefits across all registered schemes. There are two circumstances where a lifetime allowance charge arises following a BCE.

1. Where the amount crystallising at that BCE exceeds that available amount of the individual’s lifetime allowance. A lifetime allowance charge arises on the amount that crystallises beyond the available lifetime allowance.

2. Where a BCE occurs and the individual has no lifetime allowance available (as all of the lifetime allowance has been used up by earlier BCEs). This is referred to in the legislation as the ‘second lifetime allowance charge condition’. A lifetime allowance charge arises on the whole amount crystallised at that event.

The chargeable amount is the amount that crystallises for lifetime allowance purposes at a BCE that exceeds the individual’s available lifetime allowance at that point. A lifetime allowance charge arises on this chargeable amount. The purpose of this charge is to claw back the tax reliefs this amount has benefited from over the years, both on the initial payments and the build up of those funds or underlying investments over the years.

The amount crystallising at the BCE that is not covered by the available lifetime allowance is referred to as the ‘basic amount’ of the chargeable amount.

The chargeable amount is always the gross value of the benefits that exceeds the individual’s available lifetime allowance (before any tax is deducted). For certain BCEs, because the amount crystallising is based on the net value of the benefits (after any lifetime allowance charge), the amount crystallising is increased beyond the basic amount by the amount of tax paid by the scheme administrator. The legislation refers to this as a scheme-funded tax payment’.

Q: What happens if someone has moved their pension to a QROPS (and they have moved outside of the UK) but then within the “5 years rule” move back to the UK but has subsequently breached the UK retirement cap with their QROPS Plan?

Everyone is entitled to the standard lifetime allowance, which is £1.65million in the 2008/09 tax year and will increase in subsequent years. However, in certain circumstances an individual can notify the UK Revenue that they are entitled to a lifetime allowance that is higher than the standard amount: an “enhanced” lifetime allowance. A lifetime allowance charge would only arise when a benefit crystallisation event occurred if the total value of that individual's benefits exceeded their unused enhanced lifetime allowance.

The lifetime allowance can be enhanced where a transfer is made from a QROPS to a UK registered pension scheme. The “recognised overseas scheme transfer factor” broadly offsets the benefits relating to the sums and assets transferred from a pension scheme in an overseas country and prevents them giving rise to a lifetime allowance charge. This is in recognition that those sums and assets are likely to have been built up without UK tax relief.

However, that will not always be the case (for example because some of the assets were built up with the benefit of UK tax relief) so the enhancement of the individual's lifetime allowance is restricted in such circumstances.

http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm13100400.htm generally for further information. To qualify for this enhanced lifetime allowance the member must apply to HMRC no later than 5 years after 31 January following the tax year in which the transfer back to the UK takes place.
• The relevant form can be accessed here –
http://www.hmrc.gov.uk/pensionschemes/apss202.pdf
• and the guidance here –
http://www.hmrc.gov.uk/pensionschemes/apss202-notes.pdf
The UK Revenue will then provide a certificate confirming the enhanced lifetime allowance.

Q: Can I cash-in my QROPS Plan in full?

The legislation covering QROPS does allow for encashment, and is considered as a member payment, which may give rise to a member payment charge, if the member has been non UK resident for less than five complete UK tax years..

However the Trustees of the QROPS plan will use their discretion regarding full encashment as their primary duty is to provide an income from the Plan.

Q: Can a member make his own decision, without having to refer to a financial advisor, on suitability of transfer from a UK Approved Pension to a QROPS when UK tax resident?
Yes.
But in most (but not all) UK schemes the trustees or administrators have discretion as to whether to allow a member to transfer. In most cases the Trustees will not prevent a member transferring his benefit.

From an administrative point of view the Trustee or administrators will only need to satisfy themselves that the transfer is to a QROPS (this is in order to protect them against any HMRC penalty). The UK scheme will also need to complete the relevant HMRC Event Report forms and require the member to sign a discharge form.

Q: Is there any legal requirement for a Member to seek Financial Advice for a transfer to a QROPS Plan?

No, but the existing Trustee may require a member to seek appropriate advice and provide evidence of this. Some QROPS providers will only accept transfers if advice has been taken from a suitably qualified and regulated Independent Financial Advisory firm.

Glossary:

A Member Payment

A member payment is payment or a deemed payment to a member from a QROPS plan which could be either the first instalment of a series of pension payments or other non-pension payment such as a lump sum or transfer whilst the member is either:

• Resident in the UK when the payment is made (or treated as made), or
• Although not resident in the UK at that time, has been resident in the UK earlier in the tax year in which the payment is made (or treated as made) or in any of the five tax years immediately preceding that tax year.
http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM14101070.htm

GMP

GMP stands for guaranteed minimum pensions and has the same meaning as in the Pension Schemes Act 1993.

Alternatively secured pension

Alternatively secured pension Payment of income withdrawals direct from a money purchase arrangement to the member of the arrangement (who is aged 75 or over) and that meet the conditions laid down in paragraphs 12 and 13 of Schedule 28 to the Finance Act 2004.

Enhanced protection

Enhanced protection is a transitional arrangement for members of approved pension arrangements whose total pension benefits as at 5 April 2006 either exceed the lifetime allowance for the 2006/07 tax year of £1.5m or whose benefits are likely to exceed the lifetime allowance applicable when they retire.

By registering pension benefits for enhanced protection by 5 April 2009 individuals can prevent a lifetime allowance charge of up to 55% applying to any benefits which exceed the lifetime allowance. The key stipulation in registering for enhanced protection is that no further pension savings can be made after 5 April 2006 or enhanced protection will be lost. Broadly speaking, for a defined contribution arrangement, pension savings are made where a contribution is made after 5 April 2006. In general terms for a defined benefit arrangement the value of an individual’s benefits is permitted to increase between 5 April 2006 and the date of taking benefits by the greatest of 5% per annum or RPI.

Impermissible transfer

A transfer, or other action, that is defined as an impermissible transfer will cause enhanced protection to be lost. Broadly speaking an impermissible transfer is a transfer of sums or assets from an arrangement under a registered pension scheme not relating to the individual, a transfer of sums or assets which were held otherwise than by a pension scheme or the payment of a transfer lump sum death benefit into the arrangement. Please see the following link for further information -

http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM03104097.htm

Permitted transfer

Enhanced protection will be lost when a member transfers benefits which have enhanced protection, unless the transfer is a permitted transfer. Generally speaking, a permitted transfer is one where all benefits in the arrangement are transferred to one or more defined contribution arrangements and the benefits have the same actuarial value before and after transfer.

Relevant Benefit Accrual:

See Flow Chart below from HMRC – has a relevant benefit accrual occurred?

http://www.hmrc.gov.uk/manuals/rpsmmanual/attachments/rpsm03104570_flowchart_a.doc

Important Notes:

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

In addition, the information provided is also based on our current understanding of the relevant Finance Acts.

Pension investment values and income arising from them can fall as well as rise.

This information does not constitute advice and we cannot accept responsibility for its interpretation or any future changes to law. Any advice and recommendations will be given in writing.



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