QROPS 5-Year Rule
June 27th 2009 14:25
A QROPS is a ‘qualifying recognised offshore pension scheme’:
- ‘Recognised’ means the country where it is set up accepts the QROPS meets that jurisdiction’s tax rules
- ‘Offshore’ means outside the UK, which is England, Scotland, Wales and Northern Ireland
-‘Pension Scheme’ means the product is a retirement investment
When talking about a QROPS, it’s inevitable ‘the 5-year rule’ will crop up and anyone contemplating starting a QROPS must understand the implications of this rule.
Read this article for more understanding about QROPS
The fund manager is obliged to inform HMRC of any draw downs – that includes who they were paid to, when they were paid and the reason given by the scheme member.
After the first five tax years have passed, this all changes.
- The scheme is then subject to the pension rules of the country in which it is set up.
- Any draw downs are generally tax-free
- The scheme member pays tax on any income received according to the tax rules of the country where he or she lives – not the UK or the country where the QROPS is set up
- The need to buy an annuity before the scheme member is 75 years old is removed. In fact, the scheme member has no need to buy any annuity at all.
- Because there is no annuity, the pension fund is part of the scheme member’s estate and when he or she dies, can be passed on to family or loved ones like any other part of the estate
- With effective estate planning and depending on the country where the scheme member lived when they died, inheritance tax can be kept to a minimum or wiped out completely.
To make sure the scheme member does not inadvertently break the QROPS 5-year rule, here’s an example of how it works:
Fred decides is a UK resident working overseas and decides he and his wife want to retire to Spain.
They have no home in England, but Fred has several small pension pots from working for two or three UK companies. The transfer values of the pensions add up to £150,000.
Fred speaks to an independent pensions advisor who explains the QROPS rules to him and he decides to consolidate the three small funds in one QROPS.
Fred is in his early 50’s and decides to retire at the end of his 5-year rule period.
The pension is set up in Guernsey in November 2009. Fred makes regular contributions to increase his investment and does not draw down any cash.
His 5-year rule period starts on April 6, 2010 and lasts until April 5, 2015.
From November 2009 until April 5, 2010 does not count towards the 5-year period because it is not a complete tax year.
From April 6, 2015, he can enjoy the tax and investment benefits of his QROPS.
If he had drawn down any cash prior to April 5, 2015, Fred would have had to pay a tax penalty to HM Revenue and Customs. The fund manager would have been obliged to tell HMRC according to QROPS rules.
From April 6, 2015, the fund manager only has to be satisfied Fred is not living in the UK in the tax year he draws down any cash and is not obliged to inform HMRC of any transactions.
If you want to know more about setting up an offshore pension, speak to an independent financial advisor who can demonstrate he or she has experience in handling QROPS set-ups.
The advisor will explain the pros and cons of starting a QROPS and whether the scheme suits your financial and personal circumstances.
QROPS are not the best retirement planning vehicles for everyone – but your advisor should be able to tailor a strategy to meet your needs.
Contact this company to find out more about QROPS
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