For the past several years, International Financial Advisors’ have put great efforts into selling QROPS. At the same time, AVC Advisory have always maintained a healthy scepticism over the structures and their uses for all clients. There are a number of situations where QROPS may be an excellent product. However, we are cognizant that many advisors are under scrutiny for mis-selling QROPS to clients with no actually benefits of converting their UK schemes to QROPS.
Changes announced by the UK Chancellor last month will have an effect on the future use of QROPS, but in a positive or negative way? It really depends on the personal situation of the client Ц their employment position, their current age and marital status and, most importantly, their place of residence for tax purposes.
For instance, take an expat who is currently tax resident in the United States of America. When we compare treatment of income from a QROPS or a UK pension, we see very little benefit either way. Both would be treated as gross income and be subject to both United States federal and state income tax.
Beware of those advisors who claim that QROPS income can be paid «tax-free» — this is quite simply, wrong.
Income from QROPS is paid gross, but depending on the location of the client, a ‘local’ tax liability can vary dramatically Ц from zero in UAE to 30-40% in Scandinavia. In fact if a Double Tax Treaty does not exist (Isle of Man, Guernsey and Jersey, for example, have only a few DTTs), then the income could be taxed locally at upto 20% with NO personal tax allowance Ц which the client may have if they were UK resident.
If we look at the relative accessibility of both structures, we will see one of the changes outlined by Mr Osborne. Whilst the QROPS allows up to 30% Pension Commencement Lump Sum (PCLS) tax free as early as 55 years old, the UK onshore structure now is able to offer up to 25% PCLS tax free. In fact, the UK structure is MORE flexible than the QROPS because the retiree can now access as much of his pension pot as he likes over that threshold, but with the caveat that anything above that will be HEAVILY taxed, through the income tax bands.
Nevertheless there are circumstances where it is very useful to have ones pension pot in a QROPS structure, including when benefits derive in post-retirement. For example, death benefits, which can be paid to the chosen beneficiary free of tax at any point. This is mirrored by the UK onshore pensions, until the pension is УcrystallisedФ — ie. when benefits are starting to be paid out. At that point, assuming the deceased is over 75, the remaining pension pot is paid to beneficiaries net of 45% tax.
Finally, there is some grey areas which contribute an added risk factor. For example, moving the pension from an onshore structure to a QROPS could be a taxable event. This is a particular concern for our US based expat Ц where the law is unclear on taxable potential of the QROPS transfer, especially as this is reportable now under the new FATCA legislation.
In summary, there is a place for the use of QROPS in financial planning for those with UK pensions. However, it most definitely depends on the individual circumstances.
AVC Advisory have some excellent structures which can be used ONSHORE in the UK to replicate the flexibility of a QROPS structure whilst remaining in the security of the UK system, at least until retirement.I look forward to assisting those who can find me through the usual contacts, below.