Firms advertise the potential for a larger Tax Free Cash lump sum from a QROPS at retirement than a UK pension can provide. However, those that have sat and passed the advanced UK pensions examinations, and those that worked with pensions in the UK from before 2006, know that this is not always the case.
The Tax Free Cash payment is actually termed the Pension Commencement Lump Sum, it is not always tax free ( eg in places like Spain and France).
QROPS Tax Free Cash of 30%
While certain QROPS jurisdictions will allow up to 30% as a tax free lump sum, it does not mean that this would be more than a UK pension- which supposedly has a 25% limit.
Well, so are the unqualified salesmen that believe a larger QROPS Tax Free Cash sum is always the case.
Pensions accrued from April 2006 are limited to 25% of the fund as cash, but what about the situation before that? For those in occupational money purchase schemes it was possible to take far more than 25% tax free in the UK. In fact, in some cases, the whole fund could be paid out tax free.
For those with such pensions that accrued before April 2006, this tax free lump sum has some protection.
This protection is lost on a transfer to a QROPS Tax Free Cash and, even worse, some people do not qualify for the increased 30% limit anyway!
Example real life case in point
We were contacted by someone that was about to transfer to a QROPS as he had a good reason to need access to the full QROPS Tax Free Cash. He was told that if he transferred to a QROPS he could take 30% straight away, and not 25% from the fund in the UK.
His fund was £ 300,000 – so, the adviser told him he would get £90,000 as QROPS Tax Free Cash as against £75,000 from the current UK pension. An increase of £15,000, but was he right?
Unfortunately, the non-UK adviser did not know the rules or what questions to ask. His client had a CIMP ( Contracted In Money Purchase ) pension; the type that many tens of thousands of people had when they joined company pensions.
The facts – ignored or forgotten which would have resulted in bad advice and loss of tax free cash
On April 6th 2006, the client’s fund was valued at £100, 000 and the “protected cash” was £40, 000 ( 40% ) at that date.
By May 2016, the date of retirement, the client’ fund had grown to £300,000.
The adviser should have known –
- The pre 6 April 2006 tax-free lump sum entitlement increased by 20% or in line with the lifetime allowance if that increases over £1.8 million,and
- There is a formula used to calculate the member’s tax-free lump sum entitlement on their post 6 April 2006 benefits, adjusted for any change in the lifetime allowance from £1.5 million at that time.
What does that mean?
It means the client can take £48,000 from the pre 2006 part of the pension and £58,333 from his post 2006 pension- A total of 106,333 from his scheme without paying any fees to his current pension company. Almost 20% MORE from his UK pension than a QROPS.
The recommendation of utilising QROPS Tax Free Cash would allow £90,000 in total and it could have been BAD ADVICE. This is before considering QROPS fees, greater fund fees and commissions to be paid from the funds to the overseas adviser.
QROPS Tax Free Cash 30% – is it always better?
QROPS may possibly provide a greater percentage as QROPS Tax Free Cash, but it is not always the case if you are one of the hundreds of thousands that have one of the following UK pensions*-
CIMP, COMP, SSAS, EPP or a Section 32 policy.
*( Contracted in Money Purchase, Contracted Out Money Purchase, Small Self-Administered Scheme, Executive Pension Plan or Section 32 Buy Out policy )
(We have rounded the figures in this case)
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
- Drawdown vs UFPLS
- QROPS and the Pension Tax Free Lump Sum
- 10 Reasons to use a QROPS – the facts and the myths – 45 % UK pension tax (2)
- Once again Malta QROPS are under fire with the removal of phased PCLS payments
- Pensions Freedom
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