Retirement

QROPS Decisions For Public Pension Savers

Qualifying Recognised Overseas Pension Schemes (QROPS) are a tax minefield for retirement savers.

Although they are recognised as tax-efficient retirement saving wrappers, taking the wrong advice or stepping outside the rules can lead to massive penalties.

One of the important issues for retirement savers in direct benefit or final salary pension schemes is whether to jump ship to a QROPS or stay put.

There’s no doubt the government is about to close the door on public sector pension transfers to QROPS.

Chancellor George Osborne has already excluded public pensions from the massive Budget 2014 shake-up that allows many savers with small pot pensions to drawdown their funds instead of shifting them into an annuity.

New legislation promised for April 2015 is likely to lock and bar that door for good.

Pension variables to bear in mind

The problem is running a benefits analysis on whether to switch to a QROPS has a lot of variables.

Pension savers have to think about a number of points:

  • Will moving from a public to a private pension affect pension benefits? Most public pensions have added benefits that would be lost on transfer – but other benefits could outweigh the loss
  • How is the lifetime allowance likely to move in the future? The current trend is down from £1.5 million last year to £1.25 million this year. Once a fund is shifted to a QROPS, the lifetime benefit rules do not apply
  • Could a more aggressive investment strategy for some of the fund pay give extra growth in comparison to an index-linked public scheme?
  • For large pot public pensions, a QROPS has no inheritance tax on undrawn funds, compared to a 55% tax charge in the UK
  • Drawdown is subject to British government actuarial department (GAD) rates in the UK, while many QROPS financial centres allow a higher GAD rate and sometimes a larger tax-free lump-sum of 30% compared to 25% in the UK.

Tax also plays a significant part in pension drawdown. Any cash drawn in the UK over and above the 25% of the fund value attracts a tax charge at the saver’s prevailing rate of 20%, 40% or 45%.

Drawing down the same pension cash overseas can make a considerable tax difference as the rate of income tax depends on the saver’s place of residence. For instance, tax on pension benefits in Gibraltar is just 2.5% and in some countries is zero.

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