The new UK pension rules introduced on 6 April 2015 coincided with HMRC’s tightening of the rules governing QROPS. Many people with QROPS are now asking whether they should switch back to a UK-based SIPP. As is usual with UK pensions, little is straightforward, so it’s important to take advice from a qualified expert, but some points to consider include:
SIPPs are significantly cheaper to run than QROPS.
Annual charges are typically around £300 for pensions in drawdown.
One-off set-up charges are typically around £200.
In the past, two of the biggest attractions of QROPS over SIPPs were the ability to avoid tax on your pensions assets on death, and the restrictions on the amount of income you could withdraw.
Under the new pensions legislation, all death taxes on SIPPs have been removed for those who die under age 75.
If you are 75 or over when you die, you can transfer all the assets in your SIPP, free of any UK tax, to any other qualifying pension of another individual, irrespective of whether you have taken any benefits.
The beneficiaries can choose to take the entire fund as a lump sum. The previous 45% tax charge was removed on 6th April 2016: thereafter, the recipient will be charged at their own income tax rates when the benefits are taken.
Like QROPS, SIPPs now provide an unlimited income option once you are over 55. You can also receive your income tax free if you are not a UK tax resident.
However, you should remember these rules do not apply to public and private final salary (defined benefit) pension schemes. You can of course receive these pensions free of UK tax if you are non-resident for tax.
Many people overlook the ‘five-full-year’ tax rule that applies to QROPS.
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 five full tax years.
Simply leaving the UK is not enough: you need to be able to prove you are resident in another country, otherwise QROPS rules do not apply, even if your pension is in a QROPS.
Under HMRC’s new pension rules, unless the overseas jurisdiction where your QROPs is registered has made similar changes, your existing QROPs may now be invalid. In that case, you will lose all the associated tax benefits.
There is no reason why the investments in a SIPP or a QROPS should ever be placed into an investment or insurance bond. Some will tell you these are ‘more tax efficient’ or ‘protected’: neither is true, since both SIPPs and QROPS are already fully tax efficient and protected.
This is intended as general guidance only: if you’d like to have your pension reviewed by a UK-regulated G60/AF3 qualified adviser, please contact us.