QROPS – the biggest buzz word in offshore financial services in recent years. These are simply pensions located outside the UK which can accept transfers from your existing, live or frozen plans. There are a whole raft of reasons for considering a transfer of your plans to a Qualifying Recognised Overseas Pension Scheme. Here I will try and outline some of the pros and cons of QROPS.
Many UK plans will pay you an income for life, which would then be reduced to a spouse’s and/or dependent’s pension upon your death. This is known as an annuity and, on death of the final survivor, there will be no further benefits payable to anybody. A QROPS not only gives you the option of providing income for your dependents, but also the option of leaving the entire fund value to whomever you like. At the moment, there will be no tax deducted from this payment.
Back in 2006 when QROPS were introduced this new pension option was very appealing and had a flexibility not often available in the UK. Unfortunately the lack of regulation in some countries has let a number of salespeople abuse the idea. Today there are still salesmen and women in Cyprus who will always recommend a transfer to a QROP whether it is in the client’s best interest or not. I’ll come back to this later.
Another issue is the level of income and tax. Once an annuity is in place it is fixed, which means the same amount will be subject to tax, year in, year out. A QROPS gives you the option of changing the income level to suit your tax rates and, given the Cyprus option of the 5% tax rate, this can be very convenient.
A major point about QROPS in the early years was that they gave you choices which were not available in traditional pension plans. It is this flexibility that makes QROPS attractive and you will be able to undertake more precise planning to care for your changing circumstances.
In 2015 the UK Government made some significant changes to pension legislation. You no longer had to buy an annuity and there became more flexibility in the amounts you could withdraw from your pension, this made some of the advantages of the more expensive QROPS market fall away.
With Brexit round the corner there is a lot of renewed advertising from firms promoting the Pro’s of a QROPS without the Con’s. Currently, EU residents can transfer UK pensions into an EU/EEA-based QROPS tax-free. However, transferring to a QROPS outside the EU/EEA will trigger a 25% UK ‘overseas transfer charge’ (OTC). For residents of Cyprus with a UK pension considering a transfer, this means using a pension trustee based primarily in Malta or Gibraltar, two countries not exactly renowned for their high levels of Financial Regulation.
Beware also that there may be limited time to avoid this charge, as many expect HMRC will start capturing EU/EEA schemes after the Brexit transition period ends in 2020.
Once in a QROPS, funds are sheltered from UK taxes on income and gains and no longer count towards your lifetime pension allowance (LTA). If you are already over the limit when transferring, 25% is charged on the excess, but funds become immune from further LTA penalties.
The LTA for most people is £1,073,100 in the tax year 2020-21. It applies to the total of all the pensions you have, including the value of pensions promised through any defined benefit schemes you belong to, but excluding your State Pension.
Many of the advantages of a QROP can also be found in a SIPP (Self Invested Personal Pension), a UK pension but which still allows flexibility and transfers from old style inflexible UK pensions. Many non UK based advisory firms have no access or desire to use a SIPP – again more later.
Since 6th April 2015, (except in very limited circumstances), members of unfunded public service pension schemes (eg the Principal Civil Service, the NHS and Teachers’ Pension Schemes, the Armed Forces, Police) are prevented from transferring to defined contribution (DC) schemes / SIPPs or QROP scheme in order to protect the individual taxpayer. So many retirees to Cyprus will not be able to transfer. For further information on this subject please do get in touch.
Don’t be fooled, don’t be scammed. The number of print and radio adverts, articles, web site links, facebook posts etc covering this area in increasing with many carrying the undertones of a ‘buy now before it’s too late’ mantra. Be cautious, many immoral sales focused individuals will encourage this type of transfer to a new QROP and then recommend you hold an ‘investment vehicle’ inside the pension. This will be an insurance bond, probably based in Ireland, Luxembourg, Isle Of Man or Mauritius. It is this bond structure that allows the ‘salesman’ to take hidden, excessive undisclosed commissions that you could be paying for during your retirement, dragging down the value of your pension.
Overseas pension transfers are complex and it can be well worth exploring your options. Ensure you use a regulated firm with your best interests at heart, with well qualified, professional staff who will be able to evaluate all your pension options. The staff at Aisa all have relevant UK and Cyprus qualifications, giving you peace of mind that you can place your trust and faith in them.
Our goal is to seek the best outcome for our clients, always.
Lee Hinton is an Associate Member of the Chartered Institute of Securities and Investments, holds the Cyprus Ministry of Finance Advanced Examination certificate and holds the UK Diploma in Financial Planning.
Contact Lee at Aisa Group on 26951600