Top 20 Benefits of a QROPS ( deVere Group )

The top 20 most important Benefits of a
QROPS
w w w . d e v e r e - g r o u p . c o m

The top 20 most important benefits of a QROPS / deVere Group / May 2015
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1. Up to 30% Lump Sums compared with 25% in the UK
2. Testing against the falling Lifetime Allowance now
When you start drawing benefits from a UK Pension scheme typically 25% can be taken immediately as a lump sum. This
is provided certain limits are not exceeded i.e. total pensions are not larger than the lifetime allowance (LTA) currently
£1,250,000 (falling to £1,000,000 from April 6th 2016), unless you have secured one of the protection measures available.
With a QROPS after five years of non UK residence the UK payment rules no longer apply and you will be able to take up
to 30% as a lump sum.
The LTA has reduced in real terms ever since 2010/11 when Alistair Darling saw it as a means of raising funds through this
additional tax. The table below illustrates how it has fallen from its high at £1,800,000 to the low of £1,000,000 set to come
into force from April 2016.
If the LTA is exceeded the excess is taxed at 55% if taken as a lump sum or 25% if taken as income although there is still
income tax to also be applied.
This makes it painful and extremely tax inefficient for pension holders who may exceed the LTA.
When a UK Pension Scheme is transferred to a QROPS its value is tested against the LTA at that point. As the pension has
been tested against the LTA at that stage any future growth is then outside of the scope of the LTA. Recent experience
suggests that It is difficult to predict where the Chancellor will stop and therefore it may well make sense for someone to
consider a transfer to a QROPS now to test their pension against the LTA before it drops further. This is particularly relevant
over the next 12 months whilst there is the opportunity to test your pension benefits against the LTA of £1,250,000 rather
than £1,000,000. Just to note any transfer to a QROPS which exceeds the LTA triggers a tax charge of 25% irrespective of
how the benefits are later taken i.e. as a lump sum or income.
The recent trend has been quite markedly for the LTA to fall which makes this a reason to consider a transfer to a QROPS.
Since their launch in 2006, the popularity of QROPS (Qualifying Recognised Overseas Pension
Schemes), an HMRC-recognised overseas pension, continues to grow amongst expatriates and
individuals considering a move overseas.
Demand for QROPS has experienced annual growth – which looks set to continue throughout 2015
as the market continues to mature, and more people become aware of their considerable benefits.
The recent‘Pension Flexibility 2015’changes to UK pensions, have also had a limited but important
impact on the 20 benefits of QROPS set out below.
Tax Year Lifetime Allowance
2006/07 £1,500,000
2007/08 £1,600,000
2008/09 £1,650,000
2009/10 £1,750,000
2010/11 £1,800,000
2011/12 £1,800,000
2012/13 £1,500,000
2013/14 £1,500,000
2014/15 £1,250,000
2015/16 £1,250,000
2016/17 £1,000,000

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3. Income taxed in country of residence
4. Final salary schemes
5. No Income Tax charge on death- Outside the scope of the 45% tax charge
UK pensions are generally paid out net of basic-rate tax. PAYE applies to all pensions from registered pension schemes.
However, non-UK tax resident members can elect for payment to be paid out gross by completing the relevant HMRC
form. With a QROPS, clients can transfer to a jurisdiction which pays out gross income automatically and charges little or
no income tax on their pension benefits so they only pay the tax, if any, applicable in their country of residence.
The new‘Flexi-access’rules, subject to the jurisdiction adopting them and the QROPS rules being amended, will enable
individuals to access their pensions in their entirety or through phased lump sums if they wish. It is of course important to
understand what the tax situation would be and any penalties the QROPS provider may apply, as well as the performance
and penalties of the underlying investment before any withdrawal decision is made.
For non-final salary UK pensions, so long as an individual is aged below 75 and pensions do not exceed the LTA their
pension on death can be passed on to a nominated beneficiary as a tax free lump sum.
However, after the age of 75 pension benefits are subject to a 55% tax charge if paid as a lump sum to a beneficiary. This
has fallen to 45% from April 6th 2015 with this likely to be amended again to the marginal rate of tax payable by the
beneficiary from April 6th 2016.
If paid as a dependant’s pension the benefits are also free from tax other than any income tax due from the beneficiary.
With a QROPS regardless of whether the member has started taking benefits (on or after age 55) or not, dependent
on how the pension is structured there‘may’be no income tax charge imposed on the payment of a lump sum to the
member’s dependants on death providing they have been non-resident for at least 5 complete tax years.
A defined benefit, better known as a final salary scheme, is the most generous and secure type of pension arrangement
you could ever expect to receive. The generosity of these schemes have meant most have been forced to close, restrict
access or reduce benefits because they are so expensive for the employer to provide and operate.
There are a number of circumstances which may warrant at least the consideration and review from a highly qualified
professional holding the necessary UK Pension Transfer Qualifications.
The main reasons to consider a possible transfer to a QROPS could include:
• The expense to the scheme means the future ability to provide benefits has been jeopardised. If the pension
scheme collapses and the employer becomes insolvent the UK Pension Protection Fund (PPF) may honour the
benefits so long as the PPF can itself take on the burden. The PPF is not Government backed though but by a
levy on other similar UK pension schemes.
Even if the PPF steps in you must be aware that only 90% of your benefit will be protected with a cap of £32,761 per
annum. Therefore people with larger pensions are more likely to be impacted by this.
• You have a large pension and passing on as much wealth to your beneficiaries is a priority for you. The death
benefits available are dependent on whether you are a deferred or active member of a final salary scheme.
If you are a deferred member and don’t have a spouse or dependant (child under 23) then your pension income
will die with you. Transferring to a QROPS will allow you to pass on a lump sum death benefit to a beneficiary
of your choosing.

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The new rules, which apply to death benefits paid out after April 6th 2015 irrespective of the date of death, greatly alter
the death benefits on UK pensions.
In summary the rules have altered as follows:
Benefit type
Payment made before 6
April 2015
Payment made on or after 6
April 2015
Uncrystallised, member dies
before age 75

A lump sum up to the limit of
the deceased remaining lifetime
allowance can be paid tax free.
The beneficiary can: Take a
lump sum up to the limit of the
deceased remaining lifetime
allowance, paid tax free, or Take
tax free income from flexi-access
drawdown, or Buy an annuity with
payments paid tax-free.
Uncrystallised, member dies on or
after age 75
A lump sum death benefit taxed at
55% is payable.
The beneficiary can: Take income
from flexi-access drawdown taxed
at their marginal rate, or Buy an
annuity taxed at their marginal
rate, or Take a lump sum taxed at
45%
Crystallised (drawdown), member
dies before age 75
The dependant can: Continue in
drawdown, or take an annuity
which will be taxed at their
marginal rate, or Take a lump sum
death benefit which will be taxed
at 55%
from flexi-access drawdown tax
free, or Buy an annuity, which will
be paid tax free, or Take a tax-free
lump sum.
Crystallised (drawdown), member
dies on or after age 75
The dependant can: Continue in
drawdown, or take an annuity
which will be taxed at their
marginal rate, or Take a lump sum
death benefit which will be taxed
at 55%
from flexi-access drawdown taxed
at their marginal rate, or Buy an
annuity taxed at their marginal
rate, or Take a lump sum taxed at
45%

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6. Exchange rate risk
Below we have taken the graph of Sterling versus the Euro. For those people based in the Eurozone, holding a UK pension
scheme they will have witnessed a roller coaster of a ride over the past 10 years. The graph highlights this fact, which has
been caused by the appreciation of the Euro, when it almost achieved parity in late 2008 followed by a lot of volatility and
then rebounding to almost 2005 levels in March 2015.
The rule of thumb for any financial advice is to have retirement income paid out in the currency expenditure is expected
to be paid in. The majority of an individual’s expenditure will be in the currency of their country of residence. This means
receiving an income in Sterling which then has to be converted to the Euro for example, provides a huge risk with
currency fluctuations making it very hard to plan from month to month.
Using simple figures of a person receiving a scheme pension of £10,000 and its conversion to Euro’s can illustrate this
point when using an example (assuming no inflationary increase in the scheme pension)
June 20th 2005 – £10,000 x 1.50 = €15,000
December 29th 2008 – £10,000 x 1.02 = €10,200
July 24th 2012 – £10,000 x 1.29 = £12,900
March 11th 2013 – £10,000 x 1.15 = £11,500
March 11th 2015 – £10,000 x 1.42 = £14,200
Using a QROPS to transfer Sterling denominated pensions then utilising Euro denominated assets to pay out an income
in Euro’s could help prevent such large fluctuations in income. This can also protect against a permanent depreciation of a
currencies value.
1.5
1.4
1.3
1.2
1.1
1.0
2006 2008 2010 2012 2014

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7. Benefit from Worldwide investment options
9. Portability, flexibility
10. Consolidation
11. Maximising a Spouses Pension
8. Only 90% of the pension income from a QROPS is taxable (onareturntotheUK)
A QROPS can access a huge range of investment funds across a multitude of differing currencies using fund platforms
or offshore bonds. These will provide diversity and the opportunity to tailor an investment portfolio to an individual’s
specific needs.
A QROPS can potentially be used to hold commercial property as well although caution and advice is paramount in this
area because of the withholding tax applicable to UK property when held in this way.
UK pensions are understandably structured around UK residents so for an expat who has no intention of returning to the
UK they should always consider the benefits that a QROPS may bring.
QROPS are a great way to manage pension assets that have been built up throughout your life. With all the other points in
mind considering the additional benefit of the administrative efficiency a QROPS can bring it really does make a QROPS
option compelling.
QROPS have been designed and built in the 21st century for the expat community specifically in mind. This means they
are portable and can be used to provide retirement benefits wherever you reside. The correct QROPS can offer similar
flexibility to a UK SIPP when it comes to drawing down your income which is great for tax efficiency of income if you
match up tax free cash and income.
Bringing all of your historic pensions under one roof makes the administration and investment management much more
straight forward. This means it is much easier to monitor and make strategic alterations to your pension fund in order to
benefit from opportunities but and respond to any potential market downturn.
If you would prefer to take a more balanced approach splitting your pension assets between a QROPS and a UK based
pension always offers the benefit of a hedge between strategies.
Pension provision for a spouse on the death of a member is often on the forefront of a members mind. With a final salary
scheme after a member begins receiving their pension on death it is the norm for a spouse to continue to receive an
income but at a reduced level, ordinarily 50% or less if your spouse is more than 10 years younger.
With a QROPS it is possible to use up to 100% of the fund to provide a spouses pension. This may be through an annuity
or income drawdown arrangement. Many people may wish to consider transferring to a QROPS to ensure the pension
asset is able to provide a more substantial retirement income for their spouse.
Pension income paid under a QROPS to a UK resident is classed as a Foreign Pension which is taxable in the UK on 90% of
the amount arising, or, as relevant foreign income if the remittance basis is being claimed.

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12. Early Retirement
13. Pension Income Tax Planning
15. Clean Break for UK Inheritance Tax (IHT)
14. Continuing advice on your pension assets
Since the 5th April 2010 members of UK pension schemes have been restricted to being able to draw benefits from age
55 although most UK final salary schemes will have a default of 65.
It is possible for a pension member to transfer their UK Pension assets to a QROPS, which resides in another jurisdiction in
order to benefit from an earlier retirement age of 55.
The income payable from a pension is fully taxable as income and is therefore taxable at a member’s highest marginal
rate of between 0-45%.
This means that the tax payable can be quite severe. A QROPS has the ability to turn the income withdrawn on and off
between limits of 0 – 150% of GAD each year. For an Internationally mobile individual a QROPS can provide the flexibility
to draw income whenever they choose which can enable them to be shrewd and protect their pension against the tax
man by maximising what they draw when in preferable tax jurisdictions.
Those people with large estates may often wish to lose their Domicile of Origin and gain a Domicile of Choice. This may
enable them to avoid paying UK IHT on their non UK assets. It is however very difficult to lose a Domicile of Origin.
Where this is the case a person will almost invariably be advised to cut all ties with the UK, moving everything to the
country which they wish to be their Domicile of Choice. This will mean moving everything including business assets,
home, will, family and even their place of rest.
Holding a UK Pension is yet another UK based asset, which means by transferring to a QROPS you are able to break
another tie adding more weight to the argument.
A Pension is often an individual’s largest asset which means that if an expatriate leaves it unattended in a UK Pension
arrangement the likelihood is it may receive no ongoing adviser oversight. This can be detrimental when you consider the
following
• Ongoing alterations to UK Pensions legislation which may impact on your retirement funds; reducing lifetime
allowance and the increasing retirement age.
• If you hold a UK SIPP, Personal or Group Pension Plan where is the money invested? This is crucial to whether
the pension grows, keeps pace with inflation or at worst falls in value.
• Is the money invested in the correct areas, and with the best Fund Managers or have highly regarded managers
left the company as with Neil Woodfords decision to leave Invesco Perpetual.
Transferring your pensions to a QROPS will bring your assets under an umbrella from where an overseas adviser can help
to advise and monitor the pension.

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16. Early Retirement from a Final Salary Scheme
18. Protection against creditors in the event of bankruptcy
17. Breaking away from UK Pension Legislation
A Final Salary Scheme will often have quite punitive early retirement penalties for those who wish to draw their pension
prior to the‘Normal Retirement Age’set under the scheme.
Typically a scheme may impose a penalty, known as an actuarial reduction, of 0.5% per month. This means if you retire 12
months early the penalty is a 6% reduction in your annual pension income.
If you retire 5 years early the penalty increases to 30% of your annual pension.
This may mean that should a scheme member wish to retire early it may be beneficial to review and compare what
retirement income could be achieved by transferring the cash equivalent to a QROPS and drawing an income from there.
If you legitimately made pension contributions to an individual pension arrangement and later became bankrupt then
the Courts will find it difficult to retrospectively reverse the contribution made to pay creditors.
When benefits finally commence from the pension arrangement you may be ordered to pay these to creditors. In
transferring UK pension assets to a QROPS it makes it far more difficult for UK courts to take action.
In recent years the UK Government have been introducing restrictions on an individual’s ability to shelter tax through
the use of pensions. This has been through the reduction in the annual amount that can be contributed to pensions
obtaining significant tax reliefs.
The annual allowance has seen a fall from £255,000 per annum in 2010/11 to £40,000 in 2014/15.
We have also been introduced to a new term for Tax Free Cash (TFC), now termed a Pension Commencement Lump Sum
(PCLS). This may lead the way in the future for‘PCLS’being taxable, although it already has become taxable in part in the
event that a pension member exceeds the LTA.
The LTA is another allowance which is has seen a fall in recent years as illustrated in point 2 above.
All these factors are clear indicators that the UK Government is trying to limit the tax efficiency of pensions in its bid to
deal with the UK deficit. This makes for an additional reason to move away from the UK Pension regime by transferring to
a QROPS.
Tax Year Lifetime Allowance
2006/07 £215,000
2007/08 £225,000
2008/09 £235,000
2009/10 £245,000
2010/11 £255,000
2011/12 £50,000
2012/13 £50,000
2013/14 £50,000
2014/15 £40,000

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19. A home for Divorce Settlements
20. Final Salary Funding Levels and the Strength of the PPF
If a Court puts in place a pension sharing order in respect to pension assets held through a final salary scheme it is down
to the scheme trustees to decide whether or not to allow the ex-spouse to become a member of the scheme. If the
scheme trustees deny the ex-spouse entry or should they prefer to get a clean break they will have the option to transfer
the cash equivalent to a QROPS. This would also be possible with a Personal Pension.
QROPS are outside of the earmarking or pension sharing jurisdiction of the UK courts. In reality if the Courts (and the
divorcing client) realise their lack of jurisdictional power they will always have the fall back of reverting to offsetting. This
will only be of use to the Courts should the couple’s other assets outweigh that of the overseas pension rights. And of
course if the asset is declared.
Transferring UK Pension assets to a QROPS may be seen by some as a step in protecting assets from a spouse on divorce.
Quite apart from both the moral and ethical grounds for even considering this, it is potentially fraud. As the law does not
forbid a transfer, advisers should ensure that they are not seen to be promoting this or even supporting the activity.
This could be seen as a bi-product of the QROPS market which otherwise offers non-residents an excellent method of
continuing to save toward retirement in an efficient manner
The promise to pay a future income is only as strong as the pension scheme and the company who ultimately underpin
that promise. There is of course the Pension Protection Fund (PPF) which will step in should the scheme and company fail
to meet its obligation to pay the pension income.
There are limits to compensation the PPF will pay and this is dependent upon whether the member had retired at the
scheme normal retirement age (NRA), retired prior to the schemes retirement age or not yet retired.
Member has retired
• The Pension Protection Fund will pay 100%
• Payments relating to pensionable service from 5 April 1997 will then rise in line with inflation each year, subject
to a maximum of 2.5 per cent a year. Payments relating to service before that date will not increase.
• This information may also apply if you retired through ill-health or if you are receiving a pension in relation to
someone who has died.
Member retired early
• If the member had retired early and had not reached the scheme’s normal pension age when the employer
went bust, then they will generally receive 90 per cent level of compensation based on what the pension was
worth at the time. The annual compensation received would be capped.
• The cap at age 65 is, from 1 April 2014,£36,401.19 (this equates to £32,761.07 when the 90 per cent level is
applied) per year. The earlier the date of retirement, the lower the annual cap is set, to compensate for the
longer time the payment has been received for.
• Once in payment the payments relating to pensionable service from 5 April 1997 will rise in line with inflation
each year, subject to a maximum of 2.5%. Payments relating to service before that date will not increase.
Member has yet to retire.
• When the member reaches the scheme’s normal retirement age, we will pay you compensation based on the
90 per cent level subject to a cap, as described above.

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• Until normal retirement age is reached and the compensation is put in payment, the compensation
entitlement will rise in line with inflation each year, subject to a cap 5% for compensation linked to pensionable
service prior to 6 April 2009, and a cap of 2.5% in respect of compensation linked to pensionable service on or
after 6 April 2009.
• Once compensation is being paid, then payments relating to pensionable service from 5 April 1997 will rise in
line with inflation each year, subject to a maximum of 2.5 per cent. Payments relating to service before that
date will not increase.
These limiting factors harshly impact on a member with a large pension income. To put this in to monetary terms a 65
year old male would need a pension fund of circa £1,000,000 to purchase an annuity of £32,761.07 increasing in line with
RPI and providing a 50% spouses pension.
This means if the same male had a pension income of £62,760.68 and their pension fund fell into the PPF then they would
lose millions because the PPF would only protect up to a maximum of £32,761.07.
This is all assuming that the PPF was able to meet the obligation which when given that the PPF is funded by a levy on
pension schemes (which many are in trouble themselves) and the scheme is not guaranteed by the UK Government, its
ability to make pension payments could be seriously troubled.
By taking a cash equivalent transfer to a QROPS a member takes control of their own pension funds and removes it from
the risk of the pension scheme going bust.
Individual circumstances, income, objectives, experience and attitude to investment risk must be taken into account
when considering the above mentioned points.
It is crucial before making any decisions that you get professional advice from a professional, suitably skilled and
experienced financial adviser.
www.devere-group.com

Top 20 Benefits of a QROPS ( deVere Group )

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