QROPS SIPP Pension Rules Comparison
The UK pension access rules through a QROPS SIPP Pension Rules Comparison table are explained below in clear English to aid understanding
A quick summary of our QROPS SIPP Pension Rules Comparison table shows, in many instances, US persons will be better off with a UK pension and not a QROPS. Further, the QROPS SIPP Pension Rules Comparison table below will show that whilst QROPS can offer similar access they are usually at a considerable greater cost, greater risk especially for US persons, meaning they only need to be considered in specific circumstances. New rules introduced from April 2015 by the british government has, in a single stroke, improved pension access to the point that people overseas should now consider their options on QROPS or SIPPs more carefully.
The outline below is merely a QROPS SIPP Pension Rules Comparison table and is not in any way intended to be advice, or to be specific to US persons. In fact, we strongly recommend that any US person considering a QROPS should take legal counsel as well as contacting the IRS before making such a decision.
| What Benefit applies to you? | QROPS SIPP Pension Rules Comparison |
|---|---|
| 5 FULL tax years rule – Often ignored by overseas advisers but actually critical for all decision making.The key here is that both the original pension holder, and the beneficiaries of that pension if the original pension holder dies, must have been registered as non-resident in the UK for 5 full tax years to be able to enjoy the optional “benefits” of QROPS. Just leaving the UK is insufficient, as one needs to be able to prove they were resident in another country, or their beneficiaries need to.This cannot be avoided as all QROPS trustees have a legal obligation to report everything back to the UK up to 10 years after any transfer. HMRC in the UK has been known to take non-compliance seriously and it can result in 55% tax penalty. This ruling has NOT changed with the new pension rules. | What happens if you cannot prove that you have been resident overseas for 5 full UK tax years – QROPS rules do not apply even if your pension is in a QROPS!A QROPS is merely a trust that follows UK pension rules, and reverts to the UK rules if any settlor or beneficiary resides in the UK. Without qualifying, you and your beneficiaries have to follow UK pension rules, although a QROPS can be continued to be held but not touched, until the person would have been outside the UK for 5 full tax years; QROPS rules will then apply as long as the beneficiary of the fund is not in the UK and also has been outside the UK for 5 full tax years. QROPS may NOT be recognized by the IRS and therefore could incur a tax charge. |
| IMPORTANT FACTS FOR ALL READERS: All the following points are based on the fact that the people reading this have been registered for tax purposes for 5 full year’s outside the UK. Also, the rules only apply to pension funds and do not include public and private final salary (defined benefit) schemes which do not qualify under the new UK pension rules. Only a UK regulated G60/AF3 qualified adviser can advise these people, and so please contact us for advice. |
IMPORTANT FACTS FOR ALL READERS: Throughout this QROPS SIPP Pension Rules Comparison table we will refer to the DTT. The Double Tax Treaty (DTT) is the treaty on tax that the country you are resident in has with the UK and also, if applicable, with the country that your QROPS is held in. All DTT are available via ourselves for all countries and they form the basis of many critically important decisions. |
| PENSION FUND ACCESS & FLEXIBILITY – As of 6th April 2015, if you are aged 55 or more, you can have 100% access to your investment based pension (Income taxes will apply in the country you are resident in). This does not apply to Defined Benefit schemes. | The choice of SIPP or QROPS will come purely down to the country you intend to retire in and the tax rules. In most cases a SIPP will be the choice, but there are a few where QROPS should be considered. Hence the idea of this QROPS SIPP Pension Rules Comparison table. |
| INCOME INCREASE – If you are seeking a tax efficient high income as against large lump sum then this is possible, although beware having no fund left by spending it all! Under UK rules you will have two different methods of obtaining this income and you need to select the most tax efficient for your circumstances. Generic QROPS have to follow UK rules on distributions. | With unlimited income options available once you are aged 55 or over, then a SIPP will be a cheaper way of receiving ongoing income but it will either be taxable in the UK or under the DTT with the country you are resident in. The QROPS SIPP Pension Rules Comparison is more difficult to understand for some low tax countries without a UK DTT, or much lower taxation. Some QROPS jurisdictions offer limited DTT and very low taxation to reduce double taxation applied. DTT information |
| IS THERE A 45% or 55% DEATH TAX in the UK under 75? – From 6th April 2015, the ANSWER IS “NO”. Upon death your investment based pension funds are passed on with no charge in the UK, and is irrespective of whether you have taken any benefits. If when you die you are UNDER 75, the beneficiaries can choose to take the entire fund as a lump sum tax free in the UK. | For a SIPP, all death taxes have been removed under 75 and this will apply to someone dying before the 6 April 2015 as long as the fund remains untouched until after that date. If aged over 74 see RULE BELOW.Although QROPS are similar, the main issue is that distributions from QROPS may not be recognized as tax-free in the country of your beneficiaries! SIPP Pension Rules |
| IS THERE A 45% DEATH TAX CHARGE in the UK from age 75 onwards? – The ANSWER IS “NO” if advice is taken. If you are 75 or over when you die, there is a 100% transfer of a DC fund, free of any UK tax, to any other qualifying pension of another individual, irrespective of whether you have taken any benefits. We are finding people are being miss-led about this option!The beneficiaries can choose to take the entire fund as a lump sum, but until 5th April 2016, a 45% tax charge will apply.From 6th April 2016, the 45% tax charge is removed and the recipient / beneficiaries are charged at their own rate of income tax.Does not include public and private final salary (defined benefit) schemes. | This new rule makes UK pensions ideal for succession planning (passing down money to beneficiaries) and very flexible. For QROPS it is far more difficult to answer as their rules vary region by region and there is no longer a one size fits all answer (contrary to much advertising by other overseas websites.) When considering a QROPS SIPP Pension Rules Comparison then it must be understood that in some territories, QROPS will allow a full transfer out without applying any 45% tax charge, BUT the main issue is that distributions from QROPS may not be recognized as tax free in the country of your beneficiaries or you, e.g. the UK, France and the USA being key ones! For greater information than is contained in this QROPS SIPP Pension Rules Comparison table, we recommend that careful advice needs to be sought, not least of which is if any of the beneficiaries are in, or plan to return to the UK in the future. QROPS Pension Comparison |
| QROPS vs SIPPs at point of death – This question was easy to answer until April 2014 before the Chancellor’s announcement; QROPS was usually the better option for someone who had lived overseas for more than 5 full tax years (and their beneficiary had lived overseas for 5 full tax years), so long as they were not in France, the USA, etc. There is no easy answer anymore in this QROPS SIPP Pension Rules Comparison table. Whilst, the 5 full qualifying tax years still applies, the change means that QROPS trustees can only provide the same full access to 100% of the pension fund if the jurisdiction where the trustee is located / registered changes their pension legislation to match the UK’s new legislation. HMRC only allow some EU QROPS jurisdictions this flexibility. | If you, the settlor, or your beneficiaries have been out of the UK less than 5 years, then a UK pensions (SIPP) remains the best option. Additionally, up to the age of 75 upon death, there are no longer any advantages for a QROPS over a SIPP / UK pension other than tax considerations which vary according to the country that you live in, AND the country that your beneficiaries live in. If death occurs at age 75 or older then QROPS rules are more flexible, and better in some jurisdiction but not all.In fact, the main issue is that distributions from QROPS may not be recognized as tax free in the country of your beneficiaries and become taxed at a higher rate than if it had been left in the UK. BEWARE! |
| INCOME TAX EFFICIENCY (UK Rules) – The 55% capital charge on “excess” pension entitlements has been removed from April 2015 other than where tax abuse is found (typical abuse is taking of benefits before age 55, or transferring overseas to take 100% tax-free benefits within 5 years). Individuals will be given the right to choose which form of pension they want, and different rules apply to the options selected. By combining your personal income allowance (still available if you are an expat) of over £10,000, along with 25% tax free cash means that consideration should be given to taking funds annually utilising maximum UK zero tax income level and segments of 25% tax free cash. | Two UK options available:You will be able to choose between applying to take “segments” of 25% tax free cash with further income taxed at your marginal rate each year,or, taking the full fund with an income tax charge on 75% of the fund at highest assessed marginal UK rates.Both tier options would currently include any annual 0% personal allowance, even for expats, making it very competitive form of taking income for most people.Taking of funds can lead to you being put into a higher marginal tax rate, so some or all of your funds could be taxed at 20%, 40% and in the case of extreme income or lump sums being taken then it could be as high as 45%. Accessing your pension |
| INCOME TAX EFFICIENCY (QROPS vs SIPPs) – This will come down to making a decision based on the country you will be resident in at retirement and the type of DTT with either the UK, or the country the QROPS is held in.However, any saving on tax must be offset by the increased costs and charges of transferring to a QROPS which might rule out any tax advantages.It will come down to the speed at which people want to access their funds and the total value of their funds; ultimately only people with substantial funds who need to have immediate access to the whole fund will probably benefit from a transfer. | Taking into account offshore QROPS trustee and investment charges, many people will be better off with a SIPP from the UK with equivalent flexibility, matching that of QROPS up to age 75. Certainly, ignoring QROPS SIPP Pension Rules Comparison ‘s for a moment, then with funds of less than £250,000, then careful tax planning will be much more effective than transferring to a QROPS and accessing income, other than in exceptional circumstances.Contact us to see how this benefits you and for a personal calculation. Accessing your pension |
| FULL LIFETIME PENSION FUND ACCESS – From 6 April 2015, people over 55 will have full access to their DC and private pension fund, although it will be part taxed, as detailed above in the previous points about Income Tax Efficiency. | Income tax on any funds taken in excess of the tax free limit will apply in the country that you are resident in. If deemed UK resident, then taking of funds can lead to you being put into a higher marginal tax rate, so some or all of your funds could be taxed at 20%, 40% and in the case of extreme income or lump sums being taken then it could be as high as 45%. Accessing your pension |
| PENSION TRANSFERS – Funded Private and Public final salary (defined benefit) schemes can continue to be transferred to take advantage of the new rules. Unfunded schemes cannot be transferred. | Any transfer of one of these pension schemes can only be done if it is advised and signed off by a G60 / AF3 qualified individual who also is currently regulated by the UK Financial Conduct Authority, who should do a QROPS SIPP Pension Rules Comparison . |
| AVOID BONDS (investment or insurance bonds) with high commissions to ensure that your funds do not decrease due to high cost levels. High charging investment bonds with extra charges and surrender or access penalties in the early years eat into the investment though charges that are not declared by salesmen, leading to a decrease in investment returns and usually value as well! | There is no reason why a SIPP should ever be placed into an investment or insurance bond. Excuses are provided about them being “more” tax efficient or “protected”. Both of which are untrue when compared with the SIPP held in the UK which is fully tax efficient and protected already.We do not recommend anyone take out a QROPS and put it into an investment or insurance bond either. |
| AVOID UK IHT (Inheritance Tax) – for everyone, 55% death taxes are removed from 6 April 2015 from UK pensions, and funds can be handed down to beneficiary pension funds without any tax applied in the best cases. For beneficiaries under the age of 55 they can access the fund totally although a 45% tax will apply until April 2016. After this date it will become subject to legislative change. | QNUPS rules are being reviewed currently for IHT benefits. Jurisdictions who have QROPS have to alter their legislation to match the new UK rules for QROPS to qualify in each particular country where the Trustees are based.In effect, QROPS is unlikely to offer little if any benefits over a SIPP by April 2016, watch our blogs update on the latest situation. Accessing your pension |
| RETAIN FUNDS IN PENSIONS – Wherever possible it will remain advice to retain funds within the tax efficient environment of a pension rather than access it to invest elsewhere. Certain countries (like the US) will continue to recognize UK SIPP’s, although it is questionable if they will recognize non-contractual QROPS as the pension funds will have crossed international boundaries and may not be recognized as pension funds. | QROPS may be deemed a trust instead of a pension in some territories, e.g. the USA, and could be taxed accordingly. Also fund growth within the QROPS may be accessible for taxation and may result in tax assessments of non-IRS recognized funds. We would advise US persons considering their options now, not to rush to a decision without quality advice, and not mere guidance. We hope that this QROPS SIPP Pension Rules Comparison table has provided some help in understanding these complex rules. |
Contrary to some overseas marketing websites suggesting the opposite, a QROPS may not actually be the best solution in many cases for expats anymore. Our main concern – there are many people who have taken advice from the “largest international IFA’s in the world” that now have serious issues including penalties on “bonds“ held within their pensions, or potential tax liabilities within their funds. Do not be fooled into thinking “big”, “large” or “extensive worldwide coverage” means quality, or protection from bad advice. Many companies provide biased QROPS SIPP Pension Rules Comparison tables in order to promote a pension transfer. In our opinion all future advice should come from a combination of a UK based regulated adviser who works in the current system and fully understands current pension rules, and an offshore advisor who understands the double taxation treaty with the country that you are currently in, and more importantly, the country you intend to retire in. This QROPS SIPP Pension Rules Comparison table is generic and not just for the USA, and indeed QROPS SIPP Pension Rules Comparison information for the US is more specific on other pages such as frequently asked questions and tax.
We hope that this QROPS SIPP Pension Rules Comparison table has provided some help in understanding these complex rules.
This page was a QROPS SIPP Pension Rules Comparison table and below is an important disclaimer
Aisa International is not licensed to give tax advice on pension transfer matters – nothing on this page or website should be construed as personal tax advice in the US but only as guidance on the questions you should be seeking answers to.