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Stuart Ritchie

By: Stuart Ritchie

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March 6th, 2017

Updated for 2019: The differences between QROPS, QNUPS and SIPPs (plus Brexit and new Malta rules)

Pensions

If you think pensions are confusing…

You’re not alone.

Even the Chief Economist at the Bank of England, Andy Haldane has admitted: 

"I consider myself moderately financially literate. Yet I confess to not being able to make the remotest sense of pensions.”

Adding to the complexity…

Are frequent rule changes (Malta being the latest), various schemes and, of course, Brexit.

Where do you begin to simplify it all?

This is a good place to start.

A pension is arguably your most important financial obligation.

It can bring your financial dreams to life.

And holds the key to your and your family’s future happiness.

Yet 80% feel they’re not saving enough.

38% find it too confusing.

And 20% are not planning to pay into a pension at all.

In an attempt to demystify pensions, you can search online.

But your findings are likely to be insufficient and overwhelming at the same time. 

We aim to simplify everything you need to know in this blog.

Starting with the differences between QROPS, QNUPS and SIPPs…

What a no-deal Brexit means for your pension

And ending with the latest Malta rules, effective 1 July 2019.

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In a hurry? Use this list to skip to any part. 

  1. QROPS
  2. QNUPS
  3. SIPPs
  4. Brexit
  5. Malta

So find yourself a comfortable spot.

This is a comprehensive read.

(And if you still have more questions after this, feel free to leave a comment).

 

QROPS: qualifying recognised overseas pension scheme

 

A QROPS is a pension scheme outside the UK that has informed HMRC that it meets certain UK requirements, and so can take transfers form UK registered pension schemes.


Potentially suitable for

People with existing UK pension rights, who are planning to retire outside of the UK on a permanent basis, or expats already living outside of the UK.

In addition, those close to the Lifetime Allowance (the “LTA” – £1.055m in 2019) may also benefit from a QROPS, to mitigate future tax liabilities for exceeding the allowance when drawing their benefits.

 

Residency considerations

Those taking out a QROPS should be living outside of the UK for tax purposes, or planning to leave (it is to benefit those intending to move permanently from the UK that UK government policy permits transfers to overseas pension schemes without a tax penalty).

QROPS are open to anyone with a UK pension, including UK residents, expats, and non-UK nationals working in the UK but who are now residing in another country.

 

New considerations following 2017 Spring Budget

As announced in the Spring Budget 2017, a 25% tax charge will now apply to pension transfers made to QROPS. Exceptions will be made if both the individual and pension scheme are within the EEA.

 

Reporting considerations

QROPS have very specific reporting requirements.  HMRC says:

"all payments are reportable for ten years after the transfer-out of the UK registered pension scheme." 

The responsibility for reporting lies with a QROPS’ trustees.

Note: If you’ve heard of QROPS and ROPS (recognised overseas pension schemes), and wondered what the difference was, a QROPS is a ROPS which has given undertakings to HMRC to provide information about member payments etc., and certifies to HMRC that they meet the qualifying criteria.

 

Income

To be a ROPS, the ROPS’s rules relating to how you take your income have to be very similar to those governing UK pensions.

The maximum tax-free lump sum available (called a Pension Commencement Lump Sum (PCLS)) will typically be either 25% or 30% of the fund, depending on the jurisdiction of the QROPS and how long you have been a non-UK resident.

Some jurisdictions are not restricted to using UK Government Actuaries Department (GAD) rate limits for calculating how much income you can get. This means you can potentially get a higher income level from a QROPS compared to a UK defined benefit scheme.

 

Funding restrictions

QROPS cater to transfers from UK pension schemes. Typically, assets will have to be liquidated before they can be transferred to a QROPS.

 

Age limit

The maximum age to commence taking benefits is normally 75.

 

Double taxation agreement considerations

Ideally, the jurisdiction chosen for the QROPS should have an appropriate double taxation agreement with the QROPS member’s chosen country of residence in retirement – or satisfy certain other specific conditions.

We have written an online guide on international pension transfers per jurisdiction. 

 

Overseas Transfer Charge

Tax charges can arise on a transfer to a QROPS, but not if the member is resident (and stays resident for five UK tax years) in the same jurisdiction as the QROPS – treating the whole of the EU as one single jurisdiction for this purpose.

 

Inheritance tax and death considerations

QROPS funds, like UK pension funds, are normally exempt from UK inheritance tax.  But, the country where the investor is resident at death may impose some form of inheritance or death tax.

 

Positive aspects of QROPS

You can consolidate several smaller pension funds into one to create greater buying power, and potentially better investment opportunities.

A 25-30% tax-free lump sum at age 55+.

100% is transferable to beneficiaries.

UK and non-UK tax residents can use QROPS for LTA planning.  A transfer to a QROPS is a Benefit Crystallisation Event (BCE), and under current rules, once pension funds have been transferred to a QROPS, they are able to grow without further assessment of LTA limits.

Depending on whether there’s a double taxation agreement (DTA) between your country of residence and the country in which the QROPS is set up, there may be potential tax advantages.

 

Negative aspects of QROPS

QROPS trustees must report to HMRC.

There can be high transfer charges. They are sometimes mis-sold, not UK regulated (although they are regulated locally), and can incur additional tax charges if not used correctly.  

 

QNUPS - Qualifying Non-UK Pension Schemes

A QNUPS can be thought of as like a QROPS but with some differences...

 

Potentially suitable for

Anyone who wants or needs an international pension scheme.

They are occasionally marketed to high net-worth individuals who have already utilised their maximum income tax relievable pension contributions in the UK.

 

Residency considerations

No restrictions on residence – you can live where you want and have a QNUPS. But the tax treatment of the scheme will depend on your country of residence, and needs to be ascertained.

Country of residence

 

Reporting considerations

There are no HMRC reporting requirements currently. But unlike a QROPS, QNUPS are not permitted to receive transfers from UK tax-relieved(registered) pension schemes.

 

Income

Income can be taken at the age 55 or deferred until the age of 75 or later.

Note: Since 2017, 100% of the income taken from a QNUPS or a QROPS by a UK resident is subject to UK taxation.  

QNUPS follow local rules in terms of determining income, depending on the jurisdiction where the scheme is established. Income drawn from a QNUPS may be liable to tax in the country of residence at the time the income is taken.

QNUPS are generally sold as shelters from IHT, rather than access for income by the member (which defeats the object of setting up a QNUPS).

The fact you can get up to a 30% tax-free lump sum at age 55+ is generally of no relevance. 

 

Funding restrictions

Assets may not have to be liquidated before transferring them to a QNUPS (this is more an advantage than a restriction).

In theory, almost any asset class can be transferred to a QNUPS – including ‘alternative investments’, such as antiques, residential property and fine wine. 

However, in practice this is almost impossible. And where it is possible, it is very expensive, and depends entirely on the receiving QNUPS’ rules.

Funding has to look like pension funding - as a rule of thumb, consider 20% of annual income to be acceptable.

 

Age limit

Any maximum age for establishing or drawing down from a QNUPS depends on the jurisdiction of the QNUPS. 

 

Inheritance tax and death considerations

A QNUPS is exempt from UK taxes on death, unless the QNUPS member is deemed to have deliberately reduced the value of their estate immediately before death by transferring a significant part of their estate to the QNUPS.

Obviously, the fact that this is a matter where HMRC has some discretion makes the matter subjective, and so HMRC could mount a challenge if a transfer occurred shortly before death, and taxes would then be applied.

 

Positive aspects of QNUPS

There is immediate protection from IHT (subject to the above).

There is currently no limit on contributions. However, HMRC is increasingly looking at offshore structures, so it’s best to restrict overall contributions to a proportion of an your net worth – for example, 50%.

Potentially there is no maximum age limit for when you can invest into a QNUPS – but it depends on the jurisdiction of the QNUPS.  

There are no lifetime limits on fund size.

100% of the QNUPS fund is transferable to beneficiaries.

 

Negative aspects of QNUPS

There are a large number of grey areas relating to QNUPS, and a lack of any defined precedents around tax treatment.

There is no UK tax relief on the amount invested.    

As these are often sold as inheritance tax protection vehicles, they have to be used carefully, and advised on properly and technically.

QNUPS are occasionally mis-sold as being exempt from pension sharing rules on divorce – which is untrue.  

 

SIPP – self-invested personal pension

A SIPP is a form of a personal (defined contribution) pension scheme, set up in the UK and registered with HMRC.

 

Potentially suitable for

Anyone with existing UK pension assets who wants to benefit from the flexibility of a defined contribution scheme with unrestricted investment options.

 

Residency considerations

Most SIPPs are only available to UK residents, but some SIPPs are available to non-UK residents and those looking to move to the UK.

 

Reporting considerations

The SIPP member must report taxable events to HMRC via a ‘self-assessment’ tax return (which is true of any income that may be UK taxable).

The trustees of a SIPP will also report certain member payments, e.g. when taking a PCLS or drawing an income.

 

Income

Income can be taken from age 55 or later.

Income can be drawn from a SIPP fund right up to death.    

 

Funding restrictions

Other personal pension schemes and many occupational schemes can be transferred into a SIPP.

Cash contributions can be made too. However, tax relief is limited for the first 5 years of non-UK residence if the SIPP member is an expat, and the lifetime allowance limit also applies.

The lifetime allowance is currently £1.055 million.

The lifetime allowance is the maximum value of benefits that can be taken from a UK registered pension scheme such as a SIPP without being subject to the lifetime allowance charge (potentially up to 55%).     

 

Age limit

You have to be under 75 and usually a UK resident to start a SIPP.

 

Double taxation agreement considerations

If you live somewhere with no double taxation agreement with the UK, income is subject to UK tax.

You may be able to reclaim an element of this, but it could mean that you are also taxed in your country of residence.    

 

Inheritance tax and death considerations

On death before age 75, the fund can normally be distributed, inheritance tax free, to a spouse and/or dependants. This is subject to a test against the lifetime allowance.

If death occurs after 75, any tax that’s applicable will be based on the tax status of the beneficiary. This would not be subject to a test against the lifetime allowance.

Older people

 

Positive aspects of SIPPs

It is possible to invest in a wide range of underlying assets.

SIPP members can transfer assets in from other pension schemes.

The set-up costs are lower compared to some QROPS.    

There is no IHT on death.

A SIPP provides full access to UK pension flexibility, allowing the whole amount of a pension to be drawn on if required (although this is not advisable, as a pension is designed to provide an income in retirement).

 

Negative aspects of SIPPs

SIPPs can leave the member open to UK taxation if there is no double taxation agreement in place between the UK and their country of residence.   

There are no tax planning opportunities based around lifetime allowance or benefit crystallisation events.

 

Are pensions worth the hassle?

Yes.

Pensions can be tax efficient, flexible and highly beneficial.

A pension is a major part of lifetime financial planning.

They should be a major part of lifetime financial planning.

But, you must choose the right type and the right jurisdiction.

You should also be extremely cautious to make sure that you are professionally advised to maximise the advantages, and avoid any disadvantages – such as high upfront and ongoing costs, and tax charges on unauthorised payments.

 

Brexit 

Brexit has everyone clouded in confusion.

No one knows how it’s going to affect their futures.

Not to mention their UK pensions.

Will a no-deal Brexit affect it?

Will your years of saving diligently go to waste?

All those questions keeping you up at night, are answered in this blog.

 

New Malta rules effective 1 July 2019

The rules serve to further protect pension scheme members by ensuring they can only receive investment advice from investment advisers whose authorisation the Maltese financial authority (the MFSA) considers sufficiently robust.

Under the new rules, it’s no longer enough for a financial adviser to simply be licensed.

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They are required to be fully authorised to provide advice to a member under the EU’s second Markets in Financial Instruments Directive (MiFID II) from January 2018, or (outside Europe), an equivalent level of authorisation. 

Additionally, the adviser must generally be authorised in the jurisdiction in which they are resident.

 

Why professional advice matters

Opportunistic salespeople are taking advantage of the confusion stemming from Brexit and the new Malta rules.

We’ve seen a number of cases where clients have fallen prey to lofty promises of protection and capitalising on recent events.

Fraudsters capitalise on brexit - Twitter

It’s more important than ever to exercise due diligence.

Make sure your financial adviser holds the proper accreditations.

And seek a second opinion if need be.

Ours is free.

For us, your peace of mind is more important than trying to making money off of you.

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Editor's note: first published in 2017 - updated June 2019.

About Stuart Ritchie

Stuart Ritchie is a Chartered Financial Planner, APFS, Chartered Wealth Manager, Chartered FCSI

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