We wrote last year that the threat of Brexit may one day spell the end of QROPS. As it transpired, Chancellor Philip Hammond did not even wait for Article 50 to be invoked before declaring there would henceforth be a 25% charge on UK pensions being transferred overseas. And “henceforth” meant the day after his announcement.
Changes to pension legislation were definitely expected in the Spring Budget, but no one foresaw anything this drastic happening just yet. This new tax is not absolute, however, as there are circumstances in which the 25% charge does not apply. For instance, if the:
QROPS and pension holder are both in the same country after the transfer;
QROPS and pension holder are both in European Economic Area (EEA) countries after the transfer;
QROPS is an occupational pension scheme set up by the individual’s employer;
QROPS is an overseas public service pension scheme and the pension holder is employed by a participating employer;
QROPS is part of a pension scheme established by an international organisation to provide benefits in respect of past service and the pension holder is employed by that organisation.
In other words, a resident of Australia can still have an Australia-domiciled QROPS. A resident of Spain or Portugal may still transfer their pension to a Malta QROPS. And if an employer either converts their pension scheme to a QROPS or creates a QROPS for international employees, transferring that scheme would not be taxed. For those of us living in Asia, however, the tax would apply.
While many have proclaimed this a death knoll for QROPS, it is by no means the end of pension transfers. In fact, this change in legislation has already led to a renewed interest in Self-Invested Personal Pensions (SIPPs), which remain an option to anyone looking to achieve most of the same benefits offered by QROPS.
Long before QROPS, people used SIPPs to pull together the fragments of multiple company pensions they had collected over the years, and to combine them into one, easily-manageable pension. This has not changed.
Likewise, if you are looking to realise the present value of a final salary pension (whether an active or dormant scheme) and convert it into a lump sum over which you have total control, this can still be done with a SIPP. If your goal is to pass a sum of money on to your family, rather than collect a monthly pension which stops when you die, a SIPP still serves this purpose admirably.
There are three major areas where QROPS benefited expats in Asia: income tax, death tax and lifetime allowance.
A Gibraltar QROPS, for example, potentially limited the total income tax bill on your pension to 2.5%. With a SIPP, you must rely on local pension taxation rules and/or the terms of any Double Taxation Agreement (DTA) between the UK and your country of residence. There is no DTA between UK and Thailand, so a SIPP (like any UK Pension) would be taxable in the UK. According to a strict reading of the statute on Thai taxation of pensions, provided there was no remittance into the SIPP in the same year you draw your pension income from it - and provided the pension was not accumulated while employed in Thailand - any withdrawal should be free of Thai income tax.
With a QROPS, once you have lived outside of the UK for 10 years, you are exempt from the “death taxes” which may apply to a UK pension. With a SIPP, there is no such exemption. If a pension holder dies before the age of 75, there is no UK income tax on the benefits paid to the beneficiaries. If the pension holder dies after the age of 75, however, the beneficiaries are subject to tax at their applicable marginal rate on any benefit received.
Whether your pension is a QROPS or SIPP, there is a Lifetime Allowance (LTA) of ₤1 million, with any excess taxed at up to 45%. With a QROPS, however, a line is drawn under the LTA at the time of transfer (e.g. a ₤500,000 QROPS counts as ₤500,000 against your LTA … full stop). With a SIPP, any growth on that same pension taking the value over ₤1 million would give rise to the tax charge.
If you are planning to return to the UK one day, however, there is virtually no difference between QROPS and SIPPs. As a UK resident, the only extra benefit conferred by QROPS is that the LTA is locked in at the time of transfer.
Pension Transfers are alive and well – for now. The Spring Budget has illustrated that new reforms can come at any time, and are imposed with immediate effect, which is why most people have been transferring their pensions for the past decade. And the billions which have already left the UK are the reason why the HMRC is rapidly restricting those transfers.
To learn more about the latest status of pensions and pension transfers, email firstname.lastname@example.org