As the Qualifying Recognised Overseas Pension Scheme (QROPS) market shows signs of maturing, the value of pension transfers may start to level out at GBP1.5 billion a year, Old Mutual Wealth says.
Such high values demonstrate the importance of QROPSs as a pension solution in today’s market, which underlies the action taken by the UK Government to align the tax benefits of foreign and UK pension schemes.
The Finance Bill, issued on 5 December 2016, confirmed the intention of the government to level out how income is taxed, and how money is taken (pension freedoms), from QROPSs to bring them into line with UK registered pension schemes.
From 6 April 2017, 100 per cent of the income received from a QROPS by an individual who is UK resident for tax purposes will be subject to UK income tax, thereby bringing it into line with the taxation of income from UK registered pension schemes. Currently, only 90 per cent of such QROPS income is subject to UK income tax, meaning higher-rate payers are taxed at only 36pc, but this will become 40 per cent.
A new proposal, referred to in the ‘Foreign Pension Schemes policy paper’ issued on 5 December 2016, relates to allowing QROPSs to operate the same pension freedoms as UK registered pension schemes. Currently, some QROPSs are limited in the pension benefits they provide, as a minimum of 70 per cent of the pension fund needs to provide an income for life.
The policy paper proposes that these schemes are no longer restricted by the 70 per cent rule and will continue to qualify as a QROPS so long as the provider of those schemes is regulated or the scheme itself is regulated. This is potentially good news for consumers and will ensure greater consumer protection for QROPSs.
However, the draft Finance Bill issued alongside the policy paper does not address the removal of the 70 per cent rule.
Old Mutual Wealth says it is essential that the IHT exemptions afforded to QROPS is maintained.
Rachael Griffin (pictured), personal financial planning expert, Old Mutual Wealth, says: “The industry figures show a significant growth in the QROPS market since these schemes were introduced in 2006. That growth has started to level off, albeit with a short spike in 2014/15. This suggests that the market is maturing at around GBP1.5 billion a year. The average size of a QROPS transfer is over GBP100,000, highlighting the importance of these cases from a UK tax revenue perspective.
“Equalling out the tax treatment of UK and foreign pension schemes has been much anticipated. There remain clear advantages to using QROPS for people who are at risk of reaching the lifetime allowance limit on their UK registered pension scheme, and looking to move permanently overseas. QROPS have become a mainstream pension solution for expat clients and we see this continuing.”
