The pros and cons of Qnups

Since HM Revenue & Customs (HMRC) introduced the Qualifying Non-UK Pension Scheme (Qnups) in 2010, there has been much interest but little uptake of these as standalone pensions.

Initially, Qnups were regarded as inheritance tax (IHT) planning vehicles. However, the primary purpose must be to provide retirement benefits.

The limitations on how these benefits can be taken, in comparison with flexi access from UK schemes, along with the difficulty in showing that the contributions made were for genuine retirement planning, meant few Qnups were actually written.

The key differences

Unlike Qualifying Recognised Overseas Pension Schemes (Qrops), there is no notification to HMRC for a Qnups, so it is important to ensure that any scheme used as a Qnups meets all the legislation requirements. The definition of a Qnups was set out in Statutory Instrument no 51 of 2006 and no changes have been made since it was issued.

If the Qnups is in a jurisdiction where pension schemes are regulated, there is no need to provide an ‘income for life’ for 70% of the fund, providing benefits in a similar way to the UK’s flexi access.

Examples of jurisdictions where pension schemes are regulated are Isle of Man, Malta and Gibraltar.

A major concern around Qnups, and where they are most likely to be attacked by HMRC, is if it can be shown that the contribution was not made for ‘bona fide’ retirement planning.

In an ideal scenario a client would discuss his pension shortfall with his adviser, and the adviser would obtain a calculation, ideally from an actuary or similar qualified individual, of how to meet that shortfall based on his risk profile and future expectations.

The client could then invest the recommended amount into a Qnups with the plan to start taking income at retirement.

As long as this is documented fully, and the non-UK scheme meets the Qnups regulations, then any payments should be outside the client’s estate for IHT purposes.

Tax implications

While much has been said of the advantages of a Qnups, it is worthwhile looking at the potential consequences of a contribution being made and HMRC deciding that the scheme, and the contribution made, did not meet the Qnups requirements to be exempt from IHT.

Simply put, if HMRC decides that the scheme is not a Qnups, then any contribution is likely to be deemed a payment to a discretionary trust, with the tax implications of a discretionary trust.

In addition, as the person contributing was also able to benefit, this will be deemed a gift with reservation and consequently any IHT benefits will be nullified.

This means if a Qnups is being considered, it is imperative that it be well documented the investment was made for the purpose of retirement planning. A target benefit calculation should enable this to be shown.

Second, the pension scheme should be set up to ensure it meets the requirements of a Qnups in terms of its deed and rules.

The constant changes around pensions, and in particular international pensions, require good professional advice, as the consequence of doing things in the wrong way is a major unexpected tax bill.

Case study: the UK resident

By contributing the maximum amount allowable into his UK pension, James, 45, expects to have a £1m ($1.28m, €1.12m) fund by the time he retires at age 55. He estimates he will require a total income of £60,000 per year in today’s terms to allow him to maintain his lifestyle in retirement.

Assuming James’ pension fund keeps pace with inflation, a £1m fund will provide him with an estimated income of £42,500* per year in today’s terms. To top this up and target a total pension of £60,000 per year, James meets with his adviser to discuss how to do so.

Having agreed their expectations of future inflation and likely investment return, they ask Boal & Co’s actuarial team to calculate the contribution that would be used with the intention of reaching the £60,000 per year at retirement. Our actuaries calculate that an amount of £41,500 per year for 10 years** now would be required to fund the additional £17,500 at retirement.

James makes the contribution into Trinity’s pension scheme. He agrees to meet with his adviser each year to monitor the performance against the assumptions and make any adjustments required. The investment is immediately outside James’ estate for inheritance tax purposes.

*Based on HMRC Govt Actuaries Dept rates at May 2017. **The assumptions used for this example are 2% inflation, 6% investment return and 0.5% product charge.

Case study: the expat

Jane, who is 55, has been working outside of the UK for more than 30 years. She plans to retire and split her time between the UK and the holiday home she shares with her husband in Spain.

She currently has no formal pension arrangements in place at all, although she does have substantial savings that have been built up over the years. She plans on retiring in five years’ time.

Jane and her husband believe that a retirement income of £30,000 per year would suffice in order to maintain their standard of living.

On speaking to their adviser, they agree a suitable investment profile and future expectations. Based on these expectations and assumptions, they ask Boal & Co’s actuarial team to calculate the contribution needed to aim to meet this goal.

In line with the agreed assumptions for factors such as inflation, Boal & Co actuaries calculate this amount to be £460,000*, and Jane contributes this amount into the Trinity pension scheme. Jane and her adviser agree to meet each year to monitor the investment to make sure it is on track and make adjustments as required.

*The assumptions used for this example are 2.5% inflation, 6% investment return and 0.5% product charge.

Further reading:
Five things you need to know about Qnups

By John Batty, technical sales manager, Boal & Co