QROPS Vs SIPP
Many people don’t realize the increased pension income you can receive under a QROPS Vs SIPP in the UK. For British expats who are living abroad, you can now get an increased pension through a transfer to a QROPS. The focus of QROPS pension transfers for British expats has primarily been estate planning as a UK pension transfer to a QROPS avoids the 55% tax upon death that the UK imposes on private pensions once taking benefits. You also avoid UK income taxes of up to 50%. But, one of the other main benefits of a QROPS pension transfer is the ability to draw a higher income than would be available under UK pension rules.
QROPS and SIPP Pension Income Differences. What Pension Income Would I Receive at Retirement?
We know that QROPS is a great estate planning tool, as you can pass on 100% of your benefits to your loved ones upon death in the form of a lump sum. This is great for your kids, but what about your income at retirement. What do you get out of it? Well, first off, you get to avoid UK income taxes which typically ranges from 20% to 50% depending on the size of your pension pot. Secondly, a transfer to a QROPS enables a larger payout at retirement age as the pension would be based on assumed investment performance rather than UK gilts under UK pension rules.
UK gilts are bonds issued by the UK government to raise money to balance its books. It is essentially UK government debt and is considered one of the safest form of investments as you wouldn’t normally expect the UK government to go bust. These UK gilts are used to work out pension payments in the UK at retirement age.
However, due to historically low interest rates set by the Bank of England to try to promote borrowing in order to stimulate the economy, UK gilts have reached an all time low. UK gilts were 2.02% on 2nd August 2012. Annuity rates in the UK are based on these 15 year gilt yields. The latest 15 year gilt yields can be found from the FT.
The Difference Between UK SIPP and QROPS Pension Income
There has been quite a lot of pension industry press comment in the UK recently regarding the shrinking incomes available to pensioners in retirement via the GAD system.
UK pensions have seen the maximum permissible retirement income levels shrink steadily as factors such as quantative easing [governments printing money] leading to gilt yields falling dramatically to historic lows (yields recently reduced from 2.25% down to just 2%).
As the Isle of Man does not have to follow this GAD system (where a client has been non-UK resident for 5 plus years), clients are not faced with such worries; indeed many of our clients are able to access an income that is 50% greater than if they were in a UK SIPP where the GAD system for calculating maximum permitted income levels must be used.
The illustration shown below is based on a male aged 65. This shows the maximum pension per £100,000 in the pension pot.
QROPS Vs SIPP Income Comparison
|UK SIPP||IoM QROPS|
|£5,300 pa||£8,170 pa|
Amazingly the difference is a 54% higher pension under a QROPS!
This is based on a 2.0% gilt yield for a UK SIPP and a 6.0% p.a. return under a QROPS. This flexible drawdown may suit many British expats who simply wish to receive a higher income from their pension every year rather than seek capital growth. But, of course the choice is yours and you could elect to take a smaller income and concentrate on growing your portfolio, so you could take higher benefits at a later date and allow compound interest to do its work in increasing your pension pot.
For more information and our FREE 2012 QROPS Guide, please send enquiries to firstname.lastname@example.orgQROPS VS SIPP. Which Pays the Best Pension Income? by Richard Malpass