Many British expatriates living in Spain have taken advantage of the opportunity to move their UK private pensions into a Qualifying Recognised Overseas Pension Scheme (QROPS). QROPS offer many a
Many British expatriates living in Spain have taken advantage of the opportunity to move their UK private pensions into a Qualifying Recognised Overseas Pension Scheme (QROPS). QROPS offer many advantages to non-UK residents, including currency choice which enables the protection of pension income from fluctuations brought about by exchange rate movements; potentially less tax to pay on pension income and freedom from the 55% death charge on your pension fund once you have been non-UK resident for five complete and consecutive UK tax years.
Being a pension fund, a QROPS is an excellent way to hold money compared to holding it directly. Given their tax efficiency it doesn?t make much sense to try and take funds from a tax exempt pension and then invest in another investment that will be taxable. Nevertheless the national sport of trying to bust pensions and take the whole fund as cash goes on unabated.
Let?s look at the tax issues first ?
? If you look to take your whole fund as cash and you are Spanish tax resident then you will almost certainly be liable to tax which could be at a rate of up to 43% on the whole amount (or possibly even higher depending on the region where you live).
? If you then invest the released funds you will be liable to Spanish taxes on any income and gains.
? You will also have brought money into Spanish succession tax and possibly also UK inheritance tax on your death.
Generally, I believe that for the tax reasons it defies belief for most people to even consider trying to take their whole fund as a cash lump sum.
Nevertheless for some people they may feel that they have reasons for doing so.
Now let?s look at the risks of ?busting? your pension and taking it all as a lump sum.
Technically speaking there are circumstances where it is possible to have the whole of your fund payable to you as a lump sum; however I believe this approach is riddled with risks.
We know that HM Revenue & Customs in the UK stamps down hard on anyone who tries to exceed the limits imposed by them in respect of the maximum that they are allowed to withdraw from their UK pension scheme. The rationale is quite simple ? UK tax relief has been given on the pension contributions, there is no capital gains tax or corporation tax within the fund and with the exception of withholding tax on income received by the fund there is no further tax.
Within the QROPS rules themselves, the clear message from HMRC is that they expect that only up to 30% of the fund can be taken as a lump sum, with the remaining 70% to provide an income for life from the fund. In drafting the rules HMRC has left loopholes which have enabled certain schemes to avoid complying with the 70%/30%.
In my opinion this is an oversight by HMRC and not what they were intending.
On 24th February 2011 the financial publication Money Marketing reported that: ?The [UK] Government has set up a specialist fraud unit to monitor QROPS due to concerns about fraudulent activity and irresponsible transfers?.
New Zealand is a QROPS jurisdiction which to date has allowed the whole pension fund to be taken as a lump sum. Recently New Zealand-based firm Southern Star Retirement Fund decided to wind up its operation with effect from 30th June. It stopped taking new members on 5th April.
The firm says: ?The directors believe there is considerable uncertainty regarding the future of the present QROPS transfer system and have an expectation of changes being put in place by regulators which are likely to strengthen the retention requirements of members of New Zealand retirement schemes.?
This would certainly suggest at best that Southern Star believe that the days of ?busting? to cash by using New Zealand schemes are over.
The problem is that if HMRC decides to remove a QROPS from the register, it has the power to do so retrospectively. This means that they could treat the scheme as though it never had QROPS approval in the first place and therefore treat the initial transfer from the UK pension scheme as an unauthorised payment leading to a tax charge of 55% of the value of the fund transferred. With other potential penalties and interest this figure might be a lot higher than 55%. Also remember that there is no limit to how far HMRC can go back to collect this penalty and it can be collected across national boundaries.
A number of advisers have previously criticised my views on this matter, however, I make no apologies for wanting people to be able to sleep at night.
QROPS is a step forward in legislation and may be of significant benefit to many without needing to expose their pension funds to unnecessary tax and potentially unwanted penalties.
By Bill Blevins, Managing Director, Blevins Franks
2nd June 2011