QROPS loophole lets investors take double tax-free cash

Lisa Smith, BA (Hons), CeFA
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QROPS experts have uncovered a loophole that could mean retirement savers could take a double helping of tax-free cash lump sums without breaking strict pension rules.

According to the rules, a QROPS can only pay out up to 30% of the value of any amount transferred in from a UK pension scheme as a tax-free lump sum.

However, the rules do not ask the QROPS provider to identify whether the funds received are crystallised – and the questions do not need asking if the money is transferred to another scheme, so each could inadvertently pay out the tax free cash.

The error was disclosed by Aries Pension and Insurance Systems, whose director Gary Chamberlin, said: “We are not suggesting there will be a sudden yo-yo effect, with lots of scheme members scrambling back to our shores after indulging themselves with a year or two of southern weather – but it does highlight the fact loopholes continue to plague pensions legislation, despite the best efforts of the authorities to plug them. ”

Exploiting QROPS loophole is legal

The pensions firm claims that although the payout is contrary to the spirit of pension rules, taking the cash is legal for retirement savers and HM Revenue & Customs may have to introduce new laws to plug the gap.

Chamberlain explained several pension loopholes are available if savers look hard enough because of regular tweaking of pension rules.

“UK direct benefit schemes have constantly evolved their structures over the years, to meet new contingencies and provide a wider range of benefits for their members,” he said.

“Another factor is the approach of the UK authorities themselves, who – despite their claims to simplify – have over the years created a uniquely complex structure for pensions with successive new laws.”

Treasury plugged treaty loophole

Another QROPS loophole was closed by The Treasury last year, when a new double taxation treaty with Hong Kong opened a gap in the rules that let wealthy retirement savers with QROPS based in the financial centre but living in the UK pay income tax at just 15% on payments – rather than at the 40% plus rate charged in the UK.

The new law, passed in April 2011, let HMRC levy income tax on UK residents receiving payments from a QROPS if the payment comes from an offshore financial centre, providing the QROPS was opened with the intention of exploiting a double taxation treaty.

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