John Lawson, head of pension policy for Standard Life, has argued that a planned flexible drawdown regime in which people with retirement incomes in excess of £20,000 a year can withdraw any additional assets in a lump sum now gives the UK “one of the most flexible pension benefits regimes in the world.”
He added: “Qrops are typically expensive products and people would have balanced their higher costs with the benefits they offered that were not available in UK pensions. The situation is now different.”
QROPS are intended to be used by people who are moving overseas. One of their main attractions has been the higher tax-free lump sums available in various jurisdictions that offer them, compared to the UK.
The Isle of Man, for instance, offers 30% tax-free lump sums, while it is possible to obtain 100% in New Zealand, compared to the UK’s 25%.
But Lawson said high earners could now withdraw 100% of their pension pot, after the amount needed for a £20,000 income was set aside. The first 25% of this withdrawal would be tax-free, with remainder taxed depending on the rules in place where the person resided.
And he added changes to taxes applied to pensions on death – a flat 55% – instead of 35% if under 77 and 82% if older, coupled with the fact no IHT would be levied on pensions from next year, increased the UK’s regime further – though this depends on a comparison with the charges applied in other countries.
Furthermore, noted Lawson, the 55% did not apply at all if no benefits were being taken on death and the person was under 75.
“The UK is now completely tax free for UK domiciled individuals who have a UK pension fund on death and who have not been taking benefits, whereas some overseas regimes may tax death benefits for residents of that country,” explained Lawson.
Taken as a whole, Lawson said these changes had: “If not killed the [QROPS] market, it has certainly been seriously damaged.
“Why would someone want to move their pension to a place with a, probably, weaker regulatory regime, in a more expensive product when you will be able to get many of the same benefits as in a QROPS in a UK pension?”
But QROPS advisers and providers believe there will actually be little impact on the market as a result of the UK changes.
Roger Berry, managing director of Guernsey QROPS firm Concept Group, said not many people had pension pots large enough to provide a £20,000 annual income and leave much left to take as a significant lump sum afterwards.
“Let’s just say for arguments sake that to buy such a lifetime annuity requires a fund of £350,000. That doesn’t leave any significant proportion of UK pensioners who would then have much other pension planning remaining to take advantage of the flexible drawdown.”
And turning to death benefits, Berry added: “I would imagine anyone who is leaving or has left the UK would prefer not to suffer that 55% charge at all if they die leaving a residue in their pension.
“QROPS provides them with the ability to avoid that UK tax. So even a pensioner with a larger pension fund may well still choose the QROPS route over flexible drawdown as if they take the funds out of their pension using such flexibility they will face this 55% tax.”
And Geraint Davies, managing director of specialist QROPS adviser Montfort International, said: “"To ignore the regime of a country of residence is unacceptable.
“Qrops are for people who ultimately live overseas, so if a person’s going to live in another country you’ve got to know what the impact is in that country of retaining a UK pension fund whenever the UK or the local pension and tax legislation changes.
“It’s insular, parochial and worrying thinking to say they’ll be killed off – the global thinking adviser will always know he has to look at the rules in the country of residence as well as non country of residence options, before delivering advice."
