If you still have a pile of cash stashed away in your QROPS pension when you die, you need to know what will happen to the money so you can make the appropriate arrangements for your loved ones.
QROPS pensions have some important death benefits.
A QROPS is not an asset included in working out the net worth of an estate, so the good news is no inheritance tax is due on any money left in the fund.
But the bad news is anyone taking money from the fund may be liable for tax, depending on the income tax rules where they are tax resident.
A likely scenario for British expats with a QROPS is that their family and loved ones who they wish to benefit from their pension savings when they die probably still live in the UK.
Tax rules for dispersing QROPS funds
So although no IHT is paid on the lump sum, UK income tax rules apply to drawing down funds from the QROPS.
How much income tax is paid depends on how the money is taken and the age of the retirement saver when they die.
If the retirement saver dies before they are 75 years old, then the beneficiary can take the cash as a lump sum or regular payment without paying any income tax.
The rules change once the retirement saver dies once they are 75 years old or older.
For the tax year ending April 6, 2015, any lump sum payment was taxed at 45%.
Lifetime allowance and QROPS
After April 6, 2015, whether the balance of the unspent pension is taken as a lump sum or regular income, tax in the UK is taxed at the beneficiary’s marginal rate.
If the beneficiaries do not live in the UK, then their local income tax rules apply to taxing the residual cash in the pension.
The same rules apply to UK taxpayers inheriting unspent QROPS money regardless of which country the overseas pension is based in.
Another valuable benefit of a QROPS is the fund is tested against the lifetime allowance of £1 million when the cash is first transferred in from a UK pension.
Once the cash is in a QROPS, the lifetime allowance does not apply to the size of the fund and no tax penalties apply if the value of retirement savings in the pension breach the limit.
Further QROPS Information and Guidance
For more information about QROPS and the benefits it provides, download the iExpats QROPS Guide or complete the Get Advice form.
