Is It True Some QROPS Pay 30% Tax Free Lump Sums?

Just how much tax-free cash retirement savers can draw from a Qualifying Recognised Overseas Pension Schemes (QROPS) is an issue that can cause some confusion for expats.

One of the selling points providers in some financial centres trumpet about is paying a higher tax free lump sum than offered by British onshore pensions or some of their offshore rivals.

The question is do they really pay up to a 30% tax free lump sum or not?

Technically, the answer is no, because HM Revenue & Customs (HMRC) registered pension rules require providers to ring-fence 70% of the fund for paying benefits after retirement and to pay a maximum 25% tax free lump sum.

As QROPS are registered pensions by definition, the same rules apply.

How the cash lump sum rules work

However, some financial centres get around the 25% rule because the wording of the regulations is a little woolly and allows them to make a looser interpretation of the meaning.

Financial centres offering a 30% tax free lump sum include the Isle of Man, Malta and Gibraltar – although not every provider may pay more than 25% tax free even in these financial centres.

These 30% jurisdictions pay ‘up to’ a 30% tax free lump sum based on the 25% allowed in the rules by HMRC and a percentage of any growth in the fund after the transfer.

They will also make absolutely sure that HMRC QROPS rules are followed to the letter by safeguarding that 70% of the transferred for paying out pension benefits.

Boosting the tax free payment

So, although technically a QROPS provider cannot offer a 30% tax free lump sum payment, some providers can manipulate the rules without breaking them to give a larger tax-free pay out, depending on how the investments within the pension have performed since the transfer.

The play on words is around HMRC insistence that 70% of the transferred fund must be retained and 25% can be paid out tax-free, while providers have agreed with HMRC that this does not include any later growth post-transfer.

Any retirement saver who has made a QROPS transfer in recent months and invested in the right equities or bonds is likely to have seen a surge in growth that will power their tax free lump sum into the 30% bracket – providing they have based their QROPS in a financial centre offering the extra cash bonus.

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