UK Government Slash Lifetime Allowance
The UK budget has taken a sledgehammer to QROPS once again, this time slashing the annual allowance allowed to be transferred which has been cut from an all-time high of 1.8m GBP down to 1m GBP. This means Brits wanting to transfer more than a 1,000,000 Pound pension pot abroad will have to pay full UK tax on any amount over 1m GBP which they want to transfer overseas. The tax on the lifetime allowance would be 25% to 55% depending on your income bracket.
QROPS in Malta and the EU Have Full Pension Freedoms
British expats abroad have been hit again. HMRC are also reviewing the pension freedoms allowed. At the moment, only QROPS in the EU, notably Malta, are allowed full pension freedoms. In other words, British expats can access their whole pension pot in Malta.
QROPS in Australia Have Full Pension Freedoms after 60
Also, in Australia after 60 years old, you can also access your entire pension pot, as that is the rules allowed for local Australian residents. If you have transferred your pension to an Aussie Super, than you get the full pension freedoms, but at 60 rather than 55.
Many British expats who move to Australia however, prefer to transfer to a QROPS in Malta first to benefit from the investment freedoms allowed.
QROPS in New Zealand Must Provide 70% Income for Life
In New Zealand, if you transfer to a QROPS Superannuation scheme in NZ, you can take a 30% lump sum and then the rest has to provide you with an income for life. Note that a pensioner who wants a QROPS in New Zealand can only enter a NZ Kiwisaver pension scheme if he is living in New Zealand. Other pension pot members who wish to have a QROPS scheme in NZ need to be in an HMRC approved QROPS plan which only allows a 30% lump sum, not full pension freedoms. The good news is that there is no tax on income, growth or death on a QROPS in NZ.
QROPS in Gibraltar Must Provide 70% Income for Life, But Has Low Income Tax
In Gibraltar, British expats are constrained by the 30% rule. The rest must pay them a pension income for life under present regulations. This is still one of the most attractive destinations for a clients’ pension as income is taxed at source in Gibraltar at a flat rate of 2.5%. This compares to possibly being taxed in the UK at up to 45% income tax at retirement age and up to 45% tax on death after 75.
The New Pension Freedoms Are Not Extended to Gibraltar
In an explanatory memorandum to statutory instrument 2015/673 released on 13th March, the government has apparently backtracked and delayed the introduction of flexible benefits (for some QROPS jurisdictions) by leaving the 70% rule in place for a temporary period.
According to the memorandum “This is so that, in the light of subsequent events, the legislation to replace the 70% rule can be targeted more precisely to ensure that the principles behind allowing transfer to be made free of UK tax can continue to operate as Parliament intended”.
What Does This Mean for the Future of QROPS?
HMRC are taking their time to consider relaxing the instrument or seeing what other jurisdictions will make change with regards to pension freedoms.
Annuity Second Market Created2>
There was good news for those who hold an annuity. The government has allowed the creation of a secondary annuity market which will offer existing annuitants the ability to sell on their lifetime income in return for a lump sum.
Why Has the Government Allowed Pension Freedoms in the UK?
Whilst delivering what baby boomers want on a plate, the government realize this could drive consumption, stock markets, house prices AND deliver more tax.
HM Treasury expects that extra tax revenues will be £3.86 billion during the first 5 years of operation, i.e. more than 1 year’s Inheritance Tax (£3.4 billion in IHT was collected in 2013-14).
Why transfer to a QROPS vs a UK pension scheme? Well, within a QROPS satisfying instrument SI 2010/51, your pension pot remaining on death both before and after drawdown would be IHT-free. In many cases, your income tax is reduced to as low as 2.5% or even 0% in some countries.
If you cash in your UK pension scheme, not only will you pay your highest rate of income tax if you cash in your pension of up to forty five per cent, but your pension pot will suddenly be in the inheritance tax loop at 40%.