It has taken a while, but QROPS (qualifying recognised overseas pension schemes) are now emerging as a popular talking point in the world of pensions. But beware – they are not as attractive as they may appear.
The issue of the exorbitant 82 per cent tax charge applied to pension funds when pension holders die after the age of 75 is affecting more and more of us. After all, we are living longer. In 1952 when the Queen came to the throne she sent out 22 letters to those individuals who had reached the grand old age of 100 – in 2007 she wrote 4,350.
QROPS are now the latest product pension providers have come up with to avoid this prohibitive charge making use of the changes to pension legislation in April 2006.
They are aimed at individuals who have accrued pension benefits in the UK but are not resident here.
The new legislation allows them to transfer their pension entitlement into a QROPS and for the subsequent income to be taxed at the rate applicable to the tax rates of the country in which the plan is held.
The main benefit is that after five years, HMRC (Her Majesty’s Revenue & Customs) effectively washes its hands of the transfer to the QROPS and allows the client to withdraw 100 per cent of the fund tax-free.
This all sounds very attractive but my recommendation is to exercise caution.
Last week, within the space of 20 minutes, I received emails from two of our clients in Portugal after they had come across financial advisers promoting the merits of QROPS. One pointed out "the scale of fees looks daunting" – and he is right.
The process involves transferring your pension fund overseas to the Isle of Man, Guernsey, Australia, or Singapore to name a few destinations. However consider the fees. They are usually five per cent of the fund as an entry with ongoing management charges of at least one per cent. This is before any charges on the assets within the plan.
Say you have a £250,000 fund. You could be paying £19,500, nearly eight per cent, in charges in the first year and an annual fee of £7,500 in subsequent years. These are daunting figures. It is also early days for this type of arrangement. How many times in the last few years have we seen HMRC do a U-turn on pensions legislation?
On the understanding that it is the client’s intention to "drain" the pension fund by taking maximum income to reduce the potential tax charge, we have to look at ways to accommodate this within the UK pensions legislation we know today.
Income limits from annuities and pension fund withdrawal within SIPPs (Self Invested Personal Pension) are not individual specific. They are not geared to your own personal circumstances, your health record, your sex, whether you are a smoker or non-smoker. They are based on an insurance company’s experience providing income for clients.
The fact that insurance companies are producing figures linked to their past records doesn’t allow masses of flexibility and with people living longer these statistics are becoming less accurate.
The fact that life expectancy figures have risen significantly has also resulted in lower average payments from insurance companies faced with larger overall payment totals.
Ten years ago, you might have received £11,000 a year from a £100,000 pension fund. Now you would get around £7,000.
If you are in a final salary or a small self-administered scheme (SSAS), you can take advantage of an alternative called a Scheme Pension. This form of pension is client specific and means that the rate used to calculate maximum withdrawals is client-specific and takes into consideration an individual’s age, health and lifestyle.
There is welcome news for pensioners nearing the age of 75 who are not in final salary or self-administered scheme. They can now take advantage of a scheme pension as a firm of pension trustees has obtained government approval for a scheme specific fund available to pensioners who don’t have a final salary or SAPS pension.
Being in a scheme pension can make a huge difference to your pension payments. For example, take a male aged 75 in good health with a life expectancy of 14 years and a male the same age in very poor health who has a life expectancy of eight years. The benefit of the Scheme Pension is that this is reflected in the income that can be taken from the plan.
Putting this into income terms, under scheme pension within a SIPP the 75-year-old in good health with a pension fund of £500,000 could withdraw £53,224 per annum. By contrast, the 75-year-old male in very poor health could receive £80,528 per annum. This is compared to the income of £45,900 available under an Alternatively Secured Pension.
Yes, it is true the additional income would be taxed at 40 per cent. However this is a vast improvement on the 82 per cent tax charge if an annuitant dies after the age of 75. There are also ways to reduce this additional income tax liability, maybe paying pension contributions for children or grandchildren.
* Trevor Law is a director with Montpelier Group (Europe) Ltd, the privately-owned independent financial advisers located at Barston near Solihull. Email: TILaw@montpeliergroup.com