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Current Pension Rules 2021
Overseas Tax Charge
The latest changes to the Finance Act 2004 were announced and became immediately effective on 8th March 2017. As of that date a 25% Overseas Transfer Charge (OTC) is levied on transfers as they leave the UK unless one of the five following conditions are met:
- • The member is tax resident in the same jurisdiction as the QROPS is established at the date of the transfer
- • The member is tax resident in the EEA or the QROPS is established in EEA
- • The QROPS is an occupational scheme and the member is an employee of the employer sponsoring the scheme
- • The QROPS is a Public Sector Scheme and the member is an employee of the employer sponsoring the scheme
- • The QROPS is set up by an International Organisation and the member is an employee of the employer sponsoring the scheme
The current UK pension access rules, including important updates from 2015 and 2016 legislation, are explained below in clear English to aid understanding
In many instances, people will be better off with a UK pension under current pension rules. Our question to you – are you one of them? Find out below.
Avoid inaccurate websites and salesmen promoting poor advice, especially those promoting avoidance of 55% or 45% taxes upon death. We publish below easy to understand guidance that commission-hungry salesmen do not want you to know. Be the first with some Insider Knowledge.
Death Tax consideration
Pension fund “death tax” is the subject of many inaccurate promotions overseas; below we focus on the real position. In most cases you, and your beneficiaries, can have 100% access to your UK pensions without UK tax under the pension rules if you are under 75!
Whilst QROPS can offer similar access they are usually at a considerably greater cost, meaning they only need to be used in specific circumstances. You should understand that with recent rule changes, the UK government has improved UK pension access to the point where people overseas should now consider their options on QROPS or SIPPs more carefully.
IMPORTANT FACTS FOR ALL READERS:
All the following points are based on the fact that the people reading this have been registered for tax purposes for 5 full years outside the UK.
The rules only apply to pension funds and do not include public and private final salary (defined benefit) schemes, which do not qualify under the new UK pension rules. Only a UK regulated G60/AF3 qualified adviser can advise these people, and so please contact us for advice.
Throughout this we will refer to the DTT. The Double Tax Treaty (DTT) is the treaty on tax that the country you are resident in has with the UK and also, if applicable, with the country that your QROPS is held in. All DTT are available via ourselves for all countries and they form the basis of many critically important decisions.
|What Benefit applies to you?
|Which is better – SIPP or QROPS?
|5 FULL tax years rule – Often ignored by overseas advisers but actually critical for all decision making. The key here is that both the original pension holder, and the beneficiaries of that pension if the original pension holder dies, must have been registered as non-resident in the UK for 5 full tax years to be able to enjoy the optional “benefits” of QROPS. Just leaving the UK is insufficient, as one needs to be able to prove they were resident in another country, or their beneficiaries need to. This cannot be avoided as all QROPS trustees have a legal obligation to report everything back to the UK up to 10 years after any transfer. HMRC in the UK has been known to take non-compliance seriously and it can result in 55% tax penalty. This ruling has NOT changed with the new pension rules.
|What happens if you cannot prove that you have been resident overseas for 5 full UK tax years – QROPS rules do not apply even if your pension is in a QROPS! A QROPS is merely a trust that follows UK pension rules, and reverts to the UK rules if any settlor or beneficiary resides in the UK. Without qualifying, you and your beneficiaries have to follow UK pension rules, although a QROPS can be continued to be held but not touched, until the person would have been outside the UK for 5 full tax years; QROPS rules will then apply as long as the beneficiary of the fund is not in the UK and also has been outside the UK for 5 full tax years. Learn More
|PENSION FUND ACCESS & FLEXIBILITY – As of 6th April 2015, if you are aged 55 or more, you can have 100% access to your investment-based pension (Income taxes will apply in the country you are resident in). This does not apply to Defined Benefit schemes.
|The choice of SIPP or QROPS will come purely down to the country you intend to retire in and the tax rules. In most cases a SIPP will be the choice, but there are a few where QROPS should be considered.
|INCOME INCREASE – If you are seeking a tax-efficient high income as against large lump sum then this is possible, although beware having no fund left by spending it all! Under UK rules you have two different methods of obtaining this income and you need to select the most tax efficient for your circumstances. Generic QROPS have to follow UK rules on distributions.
|With unlimited income options available once you are aged 55 or over, then a SIPP will be a cheaper way of receiving ongoing income but it will either be taxable in the UK or under the DTT with the country you are resident in. For some low tax countries without a UK DTT, or much lower taxation, then a QROPS should be considered, especially if double taxation is likely. Some QROPS jurisdictions offer limited DTT and very low taxation to reduce double taxation applied. Learn More
|IS THERE A 45% or 55% DEATH TAX in the UK under 75? – As of 6th April 2015, the ANSWER IS “NO”. Upon death your investment-based pension funds are passed on with no charge in the UK, irrespective of whether you have taken any benefits. If when you die you are UNDER 75, the beneficiaries can choose to take the entire fund as a lump sum tax free in the UK.
|For a SIPP, all death taxes have been removed under 75 and this applies to someone dying before the 6 April 2015 as long as the fund remained untouched until after that date. If aged over 74 see RULE BELOW. Although QROPS are similar, the main issue is that distributions from QROPS may not be recognised as tax-free in the country of your beneficiaries! Learn More
|IS THERE A 45% DEATH TAX CHARGE in the UK from age 75 onwards? – The ANSWER IS “NO” if advice is taken. If you are 75 or over when you die, there is a 100% transfer of a DC fund, free of any UK tax, to any other qualifying pension of another individual, irrespective of whether you have taken any benefits. We are finding people are being misled about this option! The beneficiaries can choose to take the entire fund as a lump sum, and until 5th April 2016, a 45% tax charge applied. However, as of 6th April 2016, the 45% tax charge has been removed and the recipient/beneficiaries are charged at their own rate of income tax. This does not include public and private final salary (defined benefit) schemes.
|This new rule makes UK pensions ideal for succession planning (passing down money to beneficiaries) and very flexible. For QROPS it is far more difficult to answer as their rules vary region by region and there is no longer a one-size-fits-all answer (contrary to much advertising by other overseas websites). In some territories, QROPS offer the same flexibility and options, and QROPS will also allow a full transfer out without applying any 45% tax charge. However, the main issue is that distributions from QROPS may not be recognised as tax free in the country of your beneficiaries, e.g. the UK, France and the USA being key ones! Careful advice needs to be sought, especially in the event that any of the beneficiaries are in the UK, or plan to return there in the future. Learn More
|QROPS vs SIPPs at point of death – This question was easy to answer until April 2014 ; QROPS were usually the better option for someone who had lived overseas for more than 5 full tax years (where their beneficiary had also lived overseas for 5 full tax years), so long as they were not in France, the USA, etc. There is no easy answer anymore, but the 5 full qualifying tax years still applies of course. QROPS can provide the same full access to 100% of the pension fund if the jurisdiction where the QROPS is registered changes the pension legislation to match that of the UK. Currently, HMRC only allow some EU QROPS jurisdictions this flexibility.
|If you, the settlor, or your beneficiaries have been out of the UK less than 5 years, then a UK pension (SIPP) remains the best option. Upon death – under the age of 75 – there are no longer any advantages for a QROPS over a SIPP/UK pension other than tax considerations, which vary according to the country that you live in AND the country that your beneficiaries live in. If death occurs at age 75 or older then QROPS rules are more flexible, and better in some jurisdictions but not all. In fact, the main issue is that distributions from QROPS may not be recognised as tax free in the country of your beneficiaries, and so could be taxed at a higher rate than if the fund had been left in the UK. BEWARE!
|INCOME TAX EFFICIENCY (UK Rules) – The 55% capital charge on “excess” pension entitlements has been removed since April 2015 other than where tax abuse is found (typical abuse is taking of benefits before age 55, or transferring overseas to take 100% tax-free benefits within 5 years). Individuals have the right to choose which form of pension they want, and different rules apply to the options selected. Your personal tax-free income allowance of over £10,000 is still available if you are an expat, so consideration should be given to taking funds annually, utilising maximum UK zero-tax income level and segments of 25% tax-free cash.
|There are two UK options available: You are able to choose between applying to take “segments” of 25% tax-free cash with further income taxed at your marginal rate each year, or taking the full fund with an income tax charge on 75% of the fund at highest assessed marginal UK rates. Both tier options would currently include any annual 0% personal allowance, even for expats, making it very competitive form of taking income for most people. Taking of funds can lead to you being put into a higher marginal tax rate, so some or all of your funds could be taxed at 20%, 40% and, in the case of extreme income or lump sums being taken, then it could be as high as 45%.
|INCOME TAX EFFICIENCY (QROPS vs SIPPs) – This will come down to making a decision based on the country you will be resident in at retirement and the type of DTT with either the UK or the country the QROPS is held in. However, any saving on tax must be offset by the increased costs and charges of transferring to a QROPS which might rule out any tax advantages. It will come down to the speed at which people want to access their funds and the total value of their funds; ultimately only people with substantial funds who need to have immediate access to the whole fund will likely benefit from a transfer.
|Taking into account offshore QROPS trustee and investment charges, many people will be better off with a SIPP from the UK with equivalent flexibility, matching that of QROPS up to age 75. With funds of less than £150,000, then careful tax planning will be much more effective than transferring to a QROPS and accessing income, other than in exceptional circumstances. Contact us to see how this benefits you, and for a personal calculation.
|FULL LIFETIME PENSION FUND ACCESS – As of 6 April 2015, people over 55 have full access to their DC and private pension fund, although it will be part taxed, as detailed above in the previous points about Income Tax Efficiency.
|Income tax on any funds taken in excess of the tax-free limit will apply in the country that you are resident in. If deemed UK resident, then taking of funds can lead to you being put into a higher marginal tax rate, so some or all of your funds could be taxed at 20%, 40% and, in the case of extreme income or lump sums being taken, then it could be as high as 45%.
|PENSION TRANSFERS – Funded Private and Public final salary (defined benefit) schemes can continue to be transferred to take advantage of the new rules. Unfunded schemes cannot be transferred.
|Any transfer of one of these pension schemes can only be done if it is advised and signed off by a G60/AF3 qualified individual who is also currently regulated by the UK Financial Conduct Authority. New rules introduced in October 2018 mean that the adviser must provide a recommendation and take into account the investments, and their fees, that will be recommended on transfer. Beware of firms that facilitate a transfer, despite recommending not to transfer.
|AVOID BONDS (investment or insurance bonds) with high commissions to ensure that your funds do not decrease due to high cost levels. High-charging investment bonds with extra charges, and surrender or access penalties in the early years, eat into the investment though charges that are not declared by salesmen. This leads to a decrease in investment returns and usually value as well!
|There is no reason why a SIPP should ever be placed into an investment or insurance bond. Excuses are provided about them being “more” tax efficient or “protected”. Both of which are untrue when compared with the SIPP held in the UK which is fully tax efficient and protected already. We do not recommend anyone take out a QROPS and put it into an investment or insurance bond either.
|AVOID UK IHT (Inheritance Tax) – For everyone, 55% death taxes were removed from 6 April 2015 from UK pensions, and funds can be handed down to beneficiary pension funds without any tax applied in the best cases. For beneficiaries under the age of 55 they can access the fund totally, subject to legislative change.
|QNUPS rules are being reviewed for IHT benefits. Jurisdictions with QROPS have had to alter their legislation to match the UK rules to ensure the QROPS still qualify in each particular country where the Trustees are based. In effect, a QROPS is unlikely to offer many, if any, benefits over a SIPP, but keep an eye on our blog for the latest situation, or contact us if you are unsure how you are affected.
|RETAIN FUNDS IN PENSIONS – Wherever possible it will remain advice to retain funds within the tax-efficient environment of a pension rather than access it to invest elsewhere. Certain countries (like the USA) will continue to recognise UK SIPPs, although it is questionable if they will recognise non-contractual QROPS as the pension funds will have crossed international boundaries and may not be recognised as pension funds.
|Initial research indicated that the introduction of the 2016 rules would lead to a resurgence in UK-based pension vehicles such as SIPP, and indeed since then we have been contacted by many people about moving their QROPS back into a SIPP in the UK to reduce charges and improve returns. We would always advise anyone considering their options not to rush to a decision without first seeking quality advice, instead of mere guidance.