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In the Qrops zone

Skandia International head of product law and financial planning Rachael Griffin says Qrops can give people who live abroad an easy way to consolidate their UK pension assets but warns that the plans will not suit everyone

Retiring abroad and relocating perman-ently to a foreign country continues to be a popular choice for Brits who are seeking a lifestyle that the UK does not offer. Advisers with clients who are consid-ering the move to a foreign country should be equipped to answer questions around how best to organise finances pre and post-move. One area that needs to be examined – especially for those moving abroad permanently – is the suitability of moving a pension scheme outside the UK and one solution may be a transfer into a qualifying registered overseas pension scheme.

The complexity of the Qrops rules set by HMRC and the interaction of these rules with the local pension legislation of the jurisdiction in which the Qrops is established has prompted advisers to seek out information to ensure they put the best solution in place for the client. There is a growing awareness of Qrops and the benefits that this type of scheme offers those who are retiring outside the UK and research shows that advisers predict that sales of Qrops will increase, with 74 per cent of advisers expecting to write more Qrops business over the next 12 months.

Qrops can be an appropriate investment for many expats and offer a level of flexibility such as different currency options for clients who live abroad (or are planning to relocate prior to retirement). Qrops can be an effective way to consolidate UK pension assets gathered throughout someone’s working life in the UK and provide flexibility to allow retirement planning to accommodate their new lifestyle overseas.

In order for an overseas pension scheme to be regar-ded as a Qrops, a number of prescribed conditions set by UK authorities must be metGenerally, this means the scheme must be established outside of the UK and recog-nised for tax purposes by the country in which it is established. There is an additional requirement that Qrops must be regulated as a pension in the country in which it is established. If it is unregulated, the scheme must be established in either:

a: a member state of the EU or in Norway, Iceland or Liechtenstein, or
b: the scheme’s rules provide that at least 70 per cent of a member’s UK tax-relieved scheme funds will be used to provide an income for life.

Qrops pension benefits (with associated lump sums) payable to the member under the scheme from the transferred funds may not become payable earlier than the normal minimum pension age in the UK, currently set at 55. The scheme manager of the Qrops must also notify HMRC when they make a payment within the first five tax years of a member becoming non-UK tax resident.

Because pensions and therefore Qrops are a longterm investment, advisers should also give thought to which jurisdiction the Qrops will be held in. Following events of the past few years, including the collapse of some banks, the recession and the offshore review, it is no surprise that recent research outlines that regulation and financial stability top the list of things that many advisers consider when selection a Qrops jurisdiction for their clients.

When making a decision on jurisdiction, a number of factors need to be consid-ered such as financial security and, of course, the jurisdiction tax rules. For example it may be that the Qrops provider insists on a member being a local resident or the partic-ular pension rules of a juris-diction insist on certain restrictions on investments. HMRC keeps a non-exhaustive list of Qrops providers on the HMRC website.

Once an appropriate Qrops provider has been identified and a jurisdiction selected, advisers will need to explain the tax, investment diversifi-cation, flexibility and currency benefits of Qrops to the client.

Tax: Once an individual has lived outside the UK for more than five complete tax years, a Qrops scheme manager is not required to notify HMRC when benefit payments are made and the individual is not subject to UK income tax charges. This enables expatriates to get their pension benefits according to the rules applicable to the country in which the Qrops is established.
By transferring to a Qrops, it is possible to avoid any UK income tax charge and pay income tax in the country of residence, possibly at a lower rate. HMRC has clarified that Qrops are not subject to UK inheritance tax charges which applies from the introduction of Qrops (April 6, 2006). Local inherit-ance tax or wealth taxes may apply and local advice should be sought.

Investment diversification: Depending on the jurisdiction and the scheme rules of the Qrops, it may be possible to access a wide class of different investments, including offshore investment bonds.

Flexibility: Most UK pension schemes limit the lump sum which can be taken on retirement to 25 per cent of the value of the fund. The same rules that apply to UK registered pension schemes will apply to Qrops regarding the transferred fund. For example, if £100,000 was transferred and this has grown to £120,000, the lump sum that can be taken is 25 per cent of the transferred funds, that is, £25,000. Any additional payment from the original £100,000 transferred would be regarded as an unauth-orised payment. The addit-ional £20,000 growth would be subject to the local scheme rules.

After the five-year reporting period, the UK payment rules no longer apply but the Qrops provider must ensure that their Qrops status is maint-ained. Therefore, in for some Qrops jurisdictions the prov-ider will need to ensure that at least 70 per cent of the transferred amount is used to provide an income. This potentially leaves the rem-ainder available as a lump sum but may be restricted by the local pension rules in the Qrops jurisdiction.

Currency: It is possible for a Qrops to be held in a currency other than sterling. This allows the member to avoid ongoing currency fluctuations and not be subject to the currency lottery when that member retires.

If a client has any intention of returning to the UK either before taking retirement bene-fits or while in retirement, the client should seriously cons-ider whether there is any real benefit to initially transferring UK funds out of the UK-regis-tered pension scheme system.

Where the client is resident overseas, advisers should also be mindful as to any need to obtain relevant authorisation or passport from the local regulatory authorities before conducting business there.

Like with any financial products, Qrops are not for everyone and each client should be assessed individ-ually. Circumstances specific to each client such as age, current residency and future plans will all need to be cons-idered when selecting the best investment for the client. What is certain is that when suitable, Qrops will give people who live abroad (or are planning to relocate prior to retirement) a clear and easy way to consolidate their UK pension assets gathered throughout their working lives in the UK.

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