QROPS providers and non-UK financial advisers tout the fact to expats that only 90% QROPS pension income is taxable, should the expat return to the UK. The internet is full of such claims, but is this justification for taking out a QROPS?
UK Residents- is only 90% QROPS pension income taxable
When you look in to the details, it is not quite so clear cut however!
HMRC. in fact, states:
“You will usually only pay tax on 90% of your foreign pension payments (10% is exempt from tax)”
It seems to us that HMRC does not differentiate between QROPS (or funds created with transfers from UK schemes) and schemes where benefits have been accrued overseas. So, UK tax residents could make this claim that when submitting a Self Assessment Tax Return.
Is such a transfer to a QROPS justified for expats on the basis that 90% QROPS pension income is taxable, where it is probable (or most likely in some countries like the UAE) that many UK expats will return to retire in the UK?
We have tried to contact HMRC, and await their response. In the meantime, the point I want to raise is that HMRC have treaties that are to prevent double taxation, not to facilitate tax avoidance. This is well established and so one should never rule out the possibility that HMRC may look at UK residents claim to pay tax on 90% of their pension income as not applicable, if that was the intention of the transfer.
Furthermore, it could be argued that GAAR (General Anti-Avoidance Regulations) does give HMRC over-riding rights to tax pension income from QROPS and, for that matter, on QNUPS.
This would be at the marginal rates of income tax should they deem the original transfer from a UK Pension Scheme was done purely to avoid UK Income Tax. In this case, HMRC may not allow UK residents to claim that 90% of the pension income from a QROPS is taxable.
Assuming that 90% QROPS pension income is taxable and allowable, does this save you any money?
Two scenarios based on UK expat in the UAE-
With a fund of £280,000 at 60 and 3.5% natural income of £10,000 pa., a UK Resident will be a 20% taxpayer, ignoring personal allowances.
- OPTION 1 – Using a UK SIPP
UK SIPP provides £10,000 pa income. Tax @ 20%= £2,000 tax per annum
- OPTION 2 – Using a QROPS
QROPS provides £10,000 pa income, 90% of which is taxable
£9,000 pa income @20% = £1,800 tax per annum.
Is this a Good Deal?
Well, lets see.
Lets look at the trustee/custodian fees.
- Fee for SIPP is £150 pa; a typical QROPS is circa £750 pa.
- The QROPS costs around £600 per annum more!
- And, many other costs are higher in a QROPS!
Therefore, on pension fees alone, the benefit for UK residents relying upon 90% QROPS pension income is taxable will only be felt for incomes above £30,000 pa.
How big a fund would be needed to provide an income of £30,000pa?
A fund of about £850,000 or more would allow UK residents to make an income tax saving by holding their pension money in a QROPS, using the 90% rule as compared to holding their pension money in the UK.
- Even this is on the assumption that the QROPS funds are placed in competitively priced funds on competitively priced platforms as would be the case for many SIPPs -and most are not!
- Even if UK HMRC allows the 90% rule, the reality is that most QROPS are not invested as competitively as they should be. Most pension funds are invested in Insurance Bonds which means that due to the high QROPS, Insurance Bond and Fund fees, the 90% rule is ever going to save a client any money!
The evidence seems clear that you, the investor, are never, ever going save any money by using the 90% rule, even if UK HMRC allows it!
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.
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