What are the key benefits?
Annuities are generally unpopular because it means that you give up your capital, the amount that you have built up in your pension, less any tax-free cash you are allowed, to an annuity provider who will guarantee you a lifetime income. The annuity rate, however, reflects interest rates and, as current rates are extremely low, many people have received much smaller pensions than they might have hoped for. If you were being forced to buy an annuity in the current climate, you would definitely see why they are unpopular...
When transferring to a QROPS, you are not required to purchase an annuity and income can be ‘drawn-down' from the fund as and when required. The following example illustrates the point simply:
UK pension Post QROPS
Value of pension fund EUR 250,000 EUR 250,000
Cost of annuity purchase EUR 250,000 Nil
Capital remaining on Nil EUR 250,000
Another advantage of drawdown is that you will be given a lot of flexibility with the amount of income you take from your QROPS on a year by year basis. This is because you have the option to take withdrawals from your QROPS ranging from zero to 120% the current GAD rate (figure provided by the Government Actuary Department), which is calculated using your current age and the interest rates at the time of retirement. This is an advantage over the UK, as new rules have recently reduced the amount of income you are able to take from 120% to 100% of GAD.
Tax-free lump sum
With a QROPS-approved scheme, the amount of tax-free cash available at retirement can be up to 30 percent, compared to the 25 percent allowed with a UK pension. However, this does depend on which one of the approved jurisdictions is used. Due to a recent change that affects French tax residents, if you can, it is better to try and take this lump sum while you are still a tax resident in the UK. This is because France can now tax UK pension lump sums under the ‘loi de finances', which passed through the French parliament in early 2011. If the amount is under EUR 6,000, however, you will not be taxed. Even if this amount is higher, it is unlikely you will be taxed more than your current marginal tax rate.
Inheritance tax planning
Most people would like to think that, upon their death, as many of their assets as possible would be passed on to their heirs but this is a complex issue. By transferring to a QROPS, the taxation of pension benefits on death can be much less punitive. With a UK pension scheme, for example, there could be a tax liability of up to 55 percent of the fund value before being passed on. By bringing the pension out of the UK and using a QROPS-approved scheme, this tax liability can be greatly reduced or, in some cases, even wiped out completely.
If you move an arrangement out of the UK, a much wider choice of investments can be available to the pension fund, with a more global focus. This is particularly important in the current market conditions, as some existing pension schemes can even be limited to just UK investments.
This is a very important consideration for expats who have retired in France with UK pensions that will pay their pension benefit in sterling. They not only run an exchange rate risk but also will incur charges for converting their pension benefit payments into Euros. By putting your pension into a QROPS, you can receive your pension benefit payments in Euros and therefore eliminate any exchange rate risk and currency conversion charges, and have peace of mind that the amount of income you receive each month will be the same.
Can any pensions be transferred into a QROPS?
Not all pensions can be transferred into a QROPS. The main exceptions are UK State pensions and, in most cases, final salary schemes although, in the current market conditions, it would be worthwhile exploring a QROPS in more detail.
Currently HMRC is reviewing the QROPS legislation due to what has been seen as abuse of the existing rules by some providers, so it is possible that some of the above advantages could be subject to change depending on how these new regulations are put into place in each jurisdiction. However, this just enforces the fact that getting professional and fully regulated advice is crucial in helping you choose the right jurisdiction in which to hold the QROPS and a suitably approved scheme provider.
Steven Grover / Expatica
This information is only provided as a guide and, if you need assistance in this area, you are strongly advised to seek the help of a specialist in this field as each individual case is different.
Steven is a Partner with the Spectrum IFA Group in France. He specialises in assisting expatriates moving to France or already living here with tax efficient solutions for savings, investments and pensions, as well as other areas like mortgages and estate planning. You can contact him at +33 (0)325461631, via his website www.financialexpat.com or via e-mail firstname.lastname@example.org
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