QROPS Case Example

This article looks at a QROPS case example and examines the technical aspects involved in the legislation. A QROPS or Qualifying Recognised Overseas Pension Scheme is quite a mouthful, but it simply facilitates a transfer of an individual pension fund from one country to another. EU regulations enable these transfers, although individual countries can decide whether to allow them.

Currently, only the UK allows unfettered transferability; however, in time, I believe all countries will also have to comply. It’s very important for anyone considering transferring their pension to be fully aware of how the legislation affects them personally. I would always advise using the services of suitably qualified advisers to make the initial assessment.

A typical case study outlined below will show how a QROPS transfer from a UK pension can benefit those whose personal circumstances best allow them to take advantage of the legislation.

QROPS case – The European mobile professional

Silvia is a European national who has recently moved from the UK to the Netherlands. She worked for twenty years as an international lawyer for four companies and intends to work in other EU countries before retiring in France. She has four pension pots from four different insurance companies, all of which are defined contribution schemes. Defined contribution simply means her pension entitlements are based on contributions from herself and her employer. These contributions are invested, and she will be able to take a pension based on pension rules at her time of retirement. Two of her schemes only allow benefits to be withdrawn as an annuity. Insurance company specialists who calculate annuity rates work out Silvia’s expected lifespan, then apply a percentage rate to the pot from which she can withdraw income. So, in the case of a 65-year-old, for example, this rate would be around 4% per annum.

Silvia has around £500,000 in total and is not expecting to work in the UK again.

Silvia’s questions

1. As the funds are currently invested in pounds, can she change them to Euros to reflect more accurately the currency she will eventually use in France?
2. Can all four pension pots be consolidated into one?
3. As Silvia is married and has two children, what is the inheritance tax position?
4. Silvia has noticed that the funds her pensions are invested in are middle-of-the-road performers, and there isn’t much choice other than those offered by the insurance companies. What are her options?
5. Online access is limited, and the insurance companies are now unable to provide advice in the post-Brexit environment. Can this be improved?
6. As annuity rates are very low, is there a way to increase her potential income?
7. Silvia knows she can take 25% of her funds in cash, free of UK tax. How would that be treated in France?

Although Silvia doesn’t expect to work in the UK again, Lifetime Allowance (LTA) legislation means full tax benefits are only allowable up to a maximum of £1,073,100 on current legislation. If she leaves her pension funds in the UK and they perform well (say by 10% per annum), her £500,000 will soon exceed the LTA. Using the ‘rule of 7’ for simplicity, whereby the principle doubles every seven years if increased by 10% compound interest per annum, it would only take about seven years to reach her LTA. Although the Conservative government abolished the LTA, it’s rumoured that the new Labour government will reintroduce it. Silvia could then end up creating future tax liabilities.

Additionally, if reintroduced, the LTA could reduce in future years as we have seen the gradual erosion of the LTA from £1.8m to £1.5m to the current £1,073,100. 10% per annum compound interest is a good return; however, it is not impossible with the right investment portfolio. In Silvia’s case, she will either reach her LTA too quickly or her funds will have to perform badly to avoid this. Neither scenario is attractive.

The answers

Back to Silvia’s questions in the QROPS case. The answers I will give here are brief, and it must be noted that behind most simple answers is a plethora of technicalities that must be addressed and resolved.

1. Pension funds invested in a QROPS can be held in any freely convertible global currency. Silvia would opt for a Euro-based portfolio, eliminating any current or future currency risk on her pension plan
2. One of the many benefits of such a vehicle is that it can transfer your pension plans into one easy-to-manage pot. So, Silvia can consolidate all four of her pensions into a QROPS. This is particularly important for those with, say, two large and two small pots, as transferring the smaller pots individually could be expensive and, therefore, not worthwhile.
3. If Silvia leaves her pensions in her UK plans, a ‘death tax charge’ of up to 55% could be applied before any distribution to her heirs. This charge doesn’t apply with a QROPS, and if Silvia nominates her spouse as the beneficiary, the remaining fund would be transferred to him, and any potential tax would only be payable on his demise. This means Silvia’s children would eventually inherit her pension pot.
4. Another major advantage of investing in this type of pension is the availability of ‘open architecture’ for the underlying investments. Put simply, this means Silvia can invest in almost any investment fund available worldwide. This is in stark contrast to her current situation, whereby she is restricted to only a few options for each pension.
5. Modern pension investment platforms provide highly sophisticated online systems that can be viewed at any time. Plan management is much easier online, and data such as transaction history and charges applied to the platform is available. No more waiting in a telephone queue, then weeks later for information to be posted.
6. UK legislation was introduced in 2015 to provide flexible access options when withdrawing income from pension plans. Some conditions need to be met before flexibility is allowed; however, post-Brexit, it is now impossible for insurance companies to pay annuities. They also can’t transfer this type of pension into a flexible drawdown plan. Most QROPS allow flexible income withdrawal, so transferring the annuity-only plans enables Silvia to access her pension at the rate that suits her best. So, yes, Silvia can create a higher income stream. If we combine this point with potentially better investment management, the difference will be even greater as her pot will be larger.

Most QROPS allow an unlimited amount of a pension pot to be withdrawn from the minimum retirement date onwards. Care has to be taken regarding local tax legislation; however, a good adviser can calculate the best way to do this. In France, it may be best to reinvest in an Assurance Vie, for example, as they provide significant tax benefits for investors. Most EU countries have their own version of tax-beneficial investment products, so it’s important to be aware of this.

Finally, although Silvia didn’t specifically ask about the Life Time Allowance legislation, her adviser has more good news as QROPS don’t impose LTA’s. So, rather than being penalised for good investment performance, Silvia will be rewarded as her pension can grow unrestricted, making her Pension Commencement Lump Sum and income higher. This will be important if the Labour government reintroduces the LTA.

The adviser’s job is to take care of all administration on Silvia’s QROPS, provide investment and tax advice, and carefully manage her pension with future servicing.

For further information, please download our free QROPS Guide

Phil Loughton (Axis Strategy Consultants)