When examining a transfer of a UK pension to a QROPS (Qualifying Recognised Overseas Pension Scheme), an individual would look at both the pros and the cons.
One element that is always of significant interest is the lump sum or tax free cash entitlement that a QROPS could provide. This is of particular interest for migrating members of a UK final salary scheme.
There are two common methods for providing tax free cash from a UK final salary scheme.
The first method of tax free cash calculation is, typically, a reduction of the promised pension, using a commutation factor, to provide a lump sum. This commutation factor varies from scheme to scheme, although is usually in the region of 15:1. ie every £1 of the promised pension given up provides £15 of tax free cash lump sum.
The second method, is usually a final salary pension scheme will provide tax free cash on top of a pension. This entitlement is commonly worked out by multiplying the fraction 3/80ths with each year of the member’s service and their final remuneration.
It is highly unlikely that a QROPS would use anything like these calculations for tax free cash as it is unlikely that they would be final salary schemes. Realistically, a migrant using QROPS would be looking at around 25% of their transferred funds (certainly within the 5 year QROPS reporting period) as a lump sum. Specialist QROPS advice would be required as this could be more or less then what is available from their existing UK scheme.
Archive for October, 2009
Will my Tax Free Cash increase by Transferring my Final Salary Pension to a QROPS ?
Friday, October 30th, 2009Global QROPS Ltd – Clients with Contracting Out pensions (2)
Thursday, October 29th, 2009As well as employer and employee contributions, an individual could have built up an entitlement to an employers or personal pension through ‘contracting out’. Global QROPS Ltd have established, in previous news items, that these benefits are both transferrable to a QROPS (Qualifying Recognized Overseas Pension Scheme) and not detrimental to the Basic state pension. Having said that, what affect does contracting out have on the State pension overall?
What impact does contracting out have on my state pension entitlement?
When an individual is contracted out, some (or even all) of their entitlement to additional state pension (S2P) or State Earnings Related Pension (SERPS) would be reduced or even lost.
The affected on an individual’s overall benefit depends on whether they are contracted out under a stakeholder/personal pension plan or their employer’s Occupational pension scheme (such as a contracted out salary related pension scheme (COSR) or a contracted out money purchase occupational pension scheme (COMP).
Some of the national insurance contributions (NICs) paid by an employer or an individual, contribute towards their state pension. If an individual is contracted out, they lose some or all of their entitlement to the additional part of the state pension over and above the Basic State Pension. (Global QROPS Ltd can help their clients obtain a State Pension forecast in order to determine their State pension entitlements).
As a result of this, the State reduces the NIC liability on earnings between the lower earnings limit and the ‘upper accrual point’ for these individuals and their employers.
The method used to reduce the NIC liability depends on whether the individual is contracted out under a COSR, COMP or personal pension. For Global QROPS Ltd’s clients, that are looking to transfer to QROPS from a contracted out scheme, they can conceivably transfer from all of these schemes regardless of the method of contracting out.
Global QROPS Ltd – Clients with Contracting Out pensions (1)
Wednesday, October 28th, 2009Many Global QROPS clients are members of employer sponsored or personal pension schemes where they have ‘contracted-out’. Before an individual looks at potentially transferring their UK pension benefits to a Qualifying Recognized Overseas Pension Scheme (QROPS), they should, ideally, be familiar with what contracting out means.
What is contracting-out?
Contracting out is, basically, when an individual receives private pension benefits instead of part or all of their entitlement to additional state pension – which is now called the Second State Pension (S2P) but was previously know as the State Earnings Related Pension (SERPS) and prior to that the State Graduated pension.
An employer has two options, when choosing to contract a scheme member out of S2P. Either the member can be in a defined benefit (final salary) pension scheme, in which case they are contracted out on a salary related basis (COSR), or the member may be in a defined contribution scheme – in which case they are Contracted out on a money purchase basis (COMP).
Should an employer not offer contracting out in the employer’s scheme an individual can use a stakeholder or personal pension to contract out.
For those people that have employment based on self employed earnings, contracting out is not available.
Should I contract out?
If you are a member of an employer’s pension scheme, you could be contracted out without even realizing it. For those that are looking to migrate now, or in the future, having contracted out rights is advantageous. As being contracted out allows you to have a separate pension fund built up from the State, in your own right, that is transferrable to a QROPS whilst not affecting your Basic State pension benefits.
Can My QROPS Lend me Money?
Tuesday, October 27th, 2009From a legislative point of view, all registered UK pension schemes are able to lend money from the scheme to unconnected third parties. Many UK pension providers, however, have their own rules and restrictions on this. This would also be true of offshore pensions that are registered as Qualifying Recognized Overseas Pension Schemes (QROPS).
Although the UK’s Her Majesty’s Revenue and Customs (HMRC) would expect unconnected third party scheme loans, from a UK registered pension scheme or a QROPS, to be secure and on commercial terms, there is no strict limit on the amount of the loan nor legislative controls on the length of the loan term or the repayment terms.
However, although scheme loans are legislatively possible, many registered UK pension scheme providers would not allow third party loans within their schemes – given the additional monitoring that would be needed to ensure there is no abuse of the system. A QROPS provider would, in most circumstances, take the same stance as a UK registered pension or the QROPS may be in a jurisdiction where any type of loan facility is not permitted whatsoever.
One point that is the same for UK schemes and for a QROPS, is the rule on loans back to the pension member. This is not permitted. Should a UK pension member transfer their UK pension to a QROPS and then access a loan to themselves, under the connected parties rule it would be an unauthorized payment and subject to a high HMRC tax charge.
QROPS Advice from Experienced UK Authorized and Regulated Advisers
Tuesday, October 27th, 2009When taking financial advice, in all aspects of financial planning, individuals generally feel more comfortable with advisers who are experienced, authorized and regulated. This is no different for people who are seeking advice on QROPS (Qualifying Recognized Overseas Pension Schemes).
QROPS have been an essential part of retirement planning, especially for people who are migrating, since 6th April 2006 – when they first came into effect.
QROPS are essentially overseas pension schemes that are approved by the UK’s Her Majesty’s Revenue and Customs (HMRC) for receiving UK pension transfer funds. The Global QROPS Ltd advisory team have been advising on UK pension transfers to overseas schemes since before QROPS were first introduced, in the Finance Act 2004, and have been advising clients and assisting other financial advisers on QROPS from their launch to the present.
Global QROPS Ltd was established with the specific purposes of providing QROPS advice and our launch has been covered in the international financial press: http://issues.lastwordmedia.com/1N4a71b86ba6a89012.cde/page/8
Global QROPS Ltd are based in the UK and authorized and regulated by the UK financial services authority (FSA).
Receiving Regulated QROPS advice
Monday, October 26th, 2009For people looking for advice with transferring their schemes from an existing UK pension scheme to an overseas pension scheme, approved as a Qualifying Recognized Overseas Pension Scheme (QROPS), there is always the question of who should you approach for advice?
Who can provide Regulated QROPS Advice?
There are many overseas advisers (and QROPS schemes) that are more than willing to speak to an individual interested in transferring their UK pension benefits to a QROPS. In many cases a UK pension member would be receiving advice from someone who is acting in good faith but are they receiving the same protection from the regulators for UK pension to QROPS advice as they would be receiving if they were being advised on a UK pension to another UK pension, transfer?
In most cases an overseas adviser (or scheme administrator) will not be authorised and regulated by the UK Financial Services Authority (FSA) and therefore could not be subject to any complaint to the FSA ombudsman if the advice to transfer out of a UK scheme was incorrect.
Receiving regulated advice from a UK based adviser is a very important advantage for a UK pension member, particularly for a UK pension member looking for QROPS advice pre-migration, as this offers the customer a degree of protection they would not necessarily get from a non-UK based adviser.
Anyone looking for QROPS advice should check, with the adviser that they are speaking to, that they confirm they are FSA authorised and regulated.
Global QROPS Ltd are able to confirm this.
Global QROPS Ltd warning over QROPS advice from Employer’s Schemes
Sunday, October 25th, 2009For people looking to transfer out of their UK scheme to an overseas pension scheme, their first enquiry may be to the administrators or trustees that are running their existing UK pension scheme.
Global QROPS Ltd has spoken to clients, who have been advised by their scheme administrators or trustees of their employer’s pension, that a pension transfer overseas is not possible. The truth is that virtually all UK pension schemes, if no payments have commenced paying to members, can be transferred to a Qualifying Recognized Overseas Pension Scheme (QROPS).
Unless the administrators running your UK pension scheme has had a member transfer their pension overseas, since April 2006, they may not know what is possible. Small employer run schemes or even local government schemes, administered regionally, may not have overseas pension transfer experience.
A client of Global QROPS Ltd was recently told, by their UK pension administrator, that a pension transfer to Australia was impossible under UK rules. This is incorrect and with expert QROPS advice, the client will now have more flexible retirement options.
Many of the top Life Companies and SIPP (Self Invested Personal Pension Plan) providers, on the other hand, will be aware of the rules on transfers overseas. It would be a transaction that they would have completed in the past. However, they would not be in a position to select a jurisdiction or advise on a suitable QROPS.
Global QROPS Ltd, authorized and regulated by the UK financial services authority, would be able to provide the most suitable advice.
Guernsey’s QROPS Stance
Saturday, October 24th, 2009Since the introduction of QROPS (Qualifying Recognized Overseas Pension Schemes) in April 2006, the Channel Island of Guernsey has introduced many schemes that are available to accept UK transferred pension money.
As QROPS have evolved Guernsey, as a reputable financial centre, has been involved in discussions with the UK’s Her Majesty’s Revenue & Customs (HMRC). These discussions have taken place to ensure that Guernsey QROPS can continue as approved schemes, with HMRC, for accepting UK pension transfers.
With jurisdictions, such as Singapore, removed form the HMRC QROPS list in 2008 and other countries reviewed, Guernsey want their QROPS to be viewed favorably by both the customer and the authorities.
One of the first steps that the Guernsey tax authorities took was to restrict the maximum tax free cash lump sum payments to 25 per cent of the QROPS fund, applying to residents and non-residents of Guernsey alike. This applies to pension members outside of the QROPS reporting period as well as those within it.
Another major step was to ensure that any transfer from a Guernsey QROPS, made to a scheme outside of Guernsey, can only be made to another registered QROPS that, broadly speaking, imposes the same restrictions as Guernsey QROPS – such as 25 per cent tax free cash at retirement.
The main concern for Guernsey is that they do not want to be seen as a jurisdiction that encourages 100 per cent cash commutation from their schemes. The Guernsey tax authorities see that as something that could damage their reputation and potentially lead to Guernsey QROPS being removed from the HMRC list.
Global QROPS Ltd can advise people on the benefits of Guernsey QROPS as well as the flexible benefits of QROPS in other countries.
A Defined Benefit (Final Salary) pension transfer to Australia – What if I’m contracted-out?
Friday, October 23rd, 2009Many members of UK defined benefit (final salary) schemes are contracted out. How does this change a migrating member’s thinking when looking at a pension transfer to Australia?
Not everyone who is in a contracted out defined benefit scheme knows exactly what this means or the nature of the benefit. For those considering a UK pension transfer to Australia they would need pre-migration advice to be aware of the benefit they are potentially giving up from their existing UK scheme.
The final salary scheme benefit referred to as ‘contracting- out’ is the element of the pension that the employer has funded by redirecting the employees national insurance contributions, that were to provide them with the State Earnings Related Pension Scheme (SERPS), to the employer’s scheme.
In a defined benefit scheme, the pre 6th April 1997 benefits are known as GMP (Guaranteed Minimum Pension) and the post 6th April 1997 benefits are known as Section 9(2B) Rights.
Although the precise calculation of these pension rights is complicated, they could form a significant part of a member’s final salary income. The guaranteed nature of a defined benefit pension is lost when transferring to an Australian QROPS and, with it, the contracted out element.
An individual with a UK defined benefit scheme, on a permanent visa to Australia, may consider the tax free benefit gained from a transfer to an Australian QROPS appealing but they would need to weigh this against the benefit of guaranteed income for life from their UK Contracted Out Defined Benefit scheme.
Why use Guernsey QROPS?
Thursday, October 22nd, 2009There are many jurisdictions that provide QROPS (Qualifying Recognized Overseas Pension Schemes) for receiving UK transferred pensions. Amongst the jurisdictions considered, by overseas pension transfer specialists Global QROPS Ltd, is Guernsey.
Benefits of Guernsey QROPS
QROPS in Guernsey are generally considered as being tax friendly schemes for pension funds to grow. If a non-Guernsey resident transfers their UK pension funds to a Guernsey QROPS, there will generally be no Guernsey capital gains tax or income tax on any growth or investment within the scheme.
As with UK pension schemes, a Guernsey QROPS can pay a 25% tax free cash lump sum on retirement.
But probably the major benefit of a Guernsey QROPS is that the pension income can be paid tax free to non-residents, at source, from Guernsey. This means that the only income tax, that a Guernsey QROPS pension member would be subject to on income, would be in their country of residence. This would be a more tax efficient way of drawing your benefits than if the pension funds remained in a UK scheme, especially if the new country of residence does not have a double taxation agreement with the UK.
In some cases, a UK pension member may retire to a country that is a ‘tax haven’. In which case, pension income from a Guernsey QROPS could be completely tax free.
Before deciding to transfer you UK pension benefits overseas, an individual should speak to an overseas pension transfer specialist, such as Global QROPS Ltd, for advice on QROPS in all jurisdictions.