QROPS (Qualifying Recognised Overseas Pension Schemes) have been a popular pension savings vehicle for many years, especially for people who built up UK pension plans whilst living and working in the UK and have subsequently left the UK and perhaps established residency in Spain or residency in Portugal or even Gibraltar residency.
The most popular QROPS jurisdictions over the years for uk pension transfers have been Gibraltar, Malta, Isle of Man and Guernsey, although QROPS themselves are to be found in jurisdictions all over the world. HMRC update their QROPS list every 2 weeks, where you can view schemes that are recognized by them. This list can be found here.
Although clients are used to regular reviews of the underlying investments held within their QROPS pension, how often do we look at the QROPS pension trustee itself, to determine whether or not this is still the right scheme and jurisdiction for the client?
Are the Trustees fees competitive? Is their servicing and administration good enough? But arguably, one of the most important reasons for re-examining the scheme is for tax efficiency. What are tax rules and requirements applicable for when clients want to start drawing my benefits from their fund? Will they be taxed in the jurisdiction where the scheme is based or will they be taxed the jurisdiction where they are resident or both? Is it tax efficient for their present and future needs or are we sleepwalking into a tax disaster?
It is important that QROPS members and their advisers keep abreast of changes in the rules and regulations of where the QROPS is based, not only in relation to where their client is tax resident now, but where their client intends to be tax resident when they want to start drawing benefits from their fund, either as full or partial PCLS (Pension Commencement Lump Sum – more commonly known as Tax Free Cash or just lump Sum) or as income drawdown. If you are planning retirement in Spain your qrops requirements may well be different to someone establishing residency in Portugal.
Malta is a popular jurisdiction as a QROPS provider, however, it is not always suitable for when members wish to drawdown benefits from their fund. Even though Malta has multiple Double Taxation Agreements (DTA’s) with jurisdictions around the world, having a DTA in place does not automatically mean that pension income payments from Malta can be paid gross without deduction of tax to where your client might be resident.
For example, there is a DTA in existence between Malta and South Africa. However, the DTA does not cover pension taxing rights as South Africa have granted these rights to Malta. This means that all income payments from Malta QROPS to residents of South Africa are subject to 30% tax deduction at source, irrespective of the gross amount, which the member cannot re-claim back.
This is why it is more important than ever for financial advisers to check and examine the tax rules of the QROPS where the scheme is based and the tax rules in the jurisdiction where their clients are resident now and where they intend to be resident in the future.
If you think that you might be affected by situations like the one above, it would be prudent examine QROPS providers in other jurisdictions, to see whether or not it would be favourable to transfer your client there.
Often one of the perceived restrictions of transferring from one QROPS trustee to another, is the belief that the underlying investments held within the scheme would have to be sold and transferred as cash. This is not the case, as a popular method of transferring to other schemes within or away from the present jurisdiction, is via an in-specie transfer of the underlying investments. This means that they do not have to be sold and the trustee ownership of the investment vehicle can just be re-registered from the former Trustee to the new Trustee.
There is usually no additional paperwork for client and the adviser to complete, as all of this can be processed by the Trustee companies themselves.
As always, it is prudent to find out in advance if switching QROPS providers will incur exit and set-up fees. Often the new receiving scheme may forgo their initial set-up and establishment costs and it never hurts to ask if they would be willing to do this.
Transfers from one QROPS jurisdiction to another, may not always be favourable, even if the Trustee fees and quality and level of servicing would be much better elsewhere.
Gibraltar is a very popular jurisdiction for QROPS as all income payments, irrespective of the gross amount are subject to deduction of 2.5% at source, which the trustees pay directly to HM Government of Gibraltar.
However, unlike Malta, Flexible Drawdown is not permitted and Capped Drawdown limits still apply (i.e. the maximum amount of income that can be paid annually, is ‘capped’ and has to be reviewed every 3 years). Any additional tax due on the capped drawdown income payment will be dependent on the tax rules in the jurisdiction where the client is resident. Capped Drawdown limits may not be suitable for the client’s income needs that can met by flexible drawdown.
A popular method of drawing an ‘income’ from a Gibraltar QROPS is to phase PCLS withdrawals. Often, there is no real requirement for a QROPS member to withdraw their maximum permitted PCLS in one-go. Members can partially crystallise their fund and just receive a partial PCLS payments in line with their needs. Always ask your Trustee if they can do this and what are their costs and requirements for doing so.
All PCLS payments from Gibraltar based QROPS can be paid to the member with zero deduction of tax at source. Phasing PCLS withdrawals in line with the amount a client requires each year, rather than drawing the full entitlement in one-go, can often be a very efficient way of pension and tax planning. You also help to preserve the capital value of the pension fund, which can continue to grow tax free while funds remain in the scheme, and you can potentially avoid landing yourself with a large tax bill in the country where you are resident.
If you would like us to review your existing QROPS please do not hesitate to contact the team at Fiduciary Wealth, by emailing email@example.com or call us on +44 207 998 0570.
This article was kindly provided by Gary Wood, Operations Manager at IVCM Gibraltar, a global retirement solutions provider.