QROPS 2015 – The Winners and Losers
So, the budget 2015 is out, who are the winners and losers in the QROPS arena? Notable winners include Malta, which is in the EU, so the rule surrounding having to use 70% of your pension for income for life does not apply.
“That means if you transfer your UK pension to Malta, you can cash the whole lot in and get the same pension freedoms as the UK”.
However, there is a stay of execution for non-EU pensions which means pensions in Gibraltar, Guernsey, Jersey, the Isle of Man, NZ, Australia and any other non-EU jurisdictions will not be able to enjoy the same pension freedoms as the UK.
If you have a pension in Gibraltar for example, you get a 30% tax-free lump sum and the other 70% has to give you an income for life. At first, many people would assume they are better off just leaving their pensions in the UK. But, if you are in a Self-Invested Personal Pension (SIPP) in the UK for example, there is still a 45% tax on death on any lump sum left after the age of 75 years old and also, UK income tax of up to 45%.
Smaller pots of less than 100k are better off leaving their pension in the UK as they are likely to fall in a bracket with low tax and probably will spend most of their pension before death. But, that is only if you are at retirement age. Someone who is in their 40’s or even 50’s could well grow that pension pot to 400k – 600k GBP for example by the time they reach retirement.
Each case is unique and you should contact a QROPS specialist for advice on whether a transfer is reasonable.
The UK Budget 2015 – The Effect on Your UK Pension
How will the UK budget effect my pension if I leave it in the UK?
The tax-free personal allowance is being increased to £10,800 on April 6th, 2016 and £11,000 in April 2017.
So, there would be no tax on any pension pot of around 100k GBP if you take just 11,000 GBP per year and you are a basic rate tax payer.
If you earn above £100,000 per year, your personal allowance is cut in half….
… and HIGHER RATE TAX PAYERS HAVE ZERO personal allowance.
If you earn over £120,000 per year and want to cash in your pension, you will pay your highest marginal rate of tax of between 20% and 40% if you cash in your pension.
If you are earning above 150,000 GBP per year, you will pay 45% on any higher amounts you take.
But, if you were to cash it in, you pay tax at your highest marginal rate of tax over this amount, which means 20% – 45% income tax if you cash in your pension.
Also, there is a death tax of up to 45% on any lump sum left to your spouse or children.
Alternatively, they could take an income from it and pay tax at their highest marginal rate of income tax.
Pension Freedoms and Annuities 2015
Pension freedoms have been extended to people with annuities. Furthermore, you can transfer your annuity to another provider from next year.
From April 2016, the government will remove the restrictions on buying and selling existing annuities to allow pensioners to sell the income they receive from their annuity without unwinding the original annuity contract.
Pensioners will then have the freedom to use that capital as they want – just as those who reach retirement with a pension pot can do under the pension freedoms announced in Budget 2014. They can either take it as a lump sum, or place it into drawdown to use the proceeds more gradually.
UK Pension SIPP Vs QROPS in Gibraltar Example
Let’s assume your total income per year is 100,000 GBP.
In the UK, you would pay 0% on your first £5,400 20% on the next £31,865 and 40% on the rest.
You would also pay 45% tax on death after 75. The average age of death in the UK after 65 is around 84 years old currently.
If you transferred your UK pension to Gibraltar and retired in Thailand, your pension would be taxed at just 2.5% income tax on the whole lot and there would be no tax on death. You could choose the currency of your pension and it could be paid straight into your bank account in Thailand or into an offshore bank account.
QROPS Malta and the Budget 2015
A QROPS in Malta avoids all tax in the UK if you are a resident outside of the UK when you draw your pension.
Income tax? Depends on the Double Taxation Agreement between the country you reside in at retirement and Malta. Could be as low as 0%. If no DTA exists, Malta has a withholding tax of 25%
Death tax? 0% in Malta
Pension freedoms? Yes. You can withdraw as much as your pension any time you like.
QROPS Gibraltar and the Budget 2015
A QROPS in Gibraltar avoids all tax in the UK if you are a resident outside of the UK when you draw your pension.
Income tax? A flat 2.5% income tax is taken at source in Gibraltar. Then you will be subject to income tax in your country of residence.
Death tax? 0% in Gibraltar.
Pension freedoms? Not currently, but may be introduced. You cannot take a flexible pension as the current rules stand, but this may change soon. You can take 30% tax-free lump sum and the other 70% has to give you an annual income, but with GAD rates at 150%, you can still take a very high annual income with very low tax.
QROPS Isle of Man and the Budget 2015
A QROPS in the Isle of Man avoids all tax in the UK if you are a resident outside of the UK when you draw your pension.
Income tax? A flat 20% income tax is taken at source in the Isle of Man unless a Double Taxation Agreement exists between the country you reside in and the Isle of Man.
Death tax? 7.5% on death in the Isle of Man.
Pension freedoms? No. You are allowed a 30% tax-free lump sum at 55 years old and the rest can be taken as an income for life.
QROPS New Zealand and the Budget 2015
A QROPS in New Zealand avoids all tax in the UK if you are a resident outside of the UK when you draw your pension.
Income tax? There is no income tax in New Zealand.
Death tax? There is no tax on death.
Pension freedoms? 30/70 rule applies.
Investment options? The investment options are much more restricted in New Zealand and requires an NZ discretionary fund manager. This limits your options and potentially the growth, which is why a QROPS in NZ is often for older pensioners who are looking to avoid tax on death rather than younger savers. This is a better option for someone in their 70s with a large pension pot and conservative outlook, who wants to pass on their pension pot tax-free to his beneficiaries. For younger savers, a Malta or Gibraltar QROPS may be better.
Summary of the UK Budget 2015 and QROPS
If you go to flexi-drawdown in the UK, you not only pay income tax of up to 45% and 45% tax on death on lump sums left after 75, but you are also moving your pension monies into UK IHT at 40%. The UK government are well aware of this and HM Treasury expects that extra tax revenues will raise£3.86 billion during the first 5 years of operation!
That is more than one year’s Inheritance Tax (£3.4 billion in IHT was collected in 2013-14).
Anyone who is thinking of cashing in their pension to buy property will be whacked by even more taxes and costs, plus leave themselves exposed to negative equity.
A QROPS avoids all UK taxes as long as you retire abroad. Even if you do return, you can reduce your tax on death considerably due to benefits taken whilst away. You get to take a bigger tax-free lump sum than in the UK – 30% rather than 25% and the rest of the income tax can be reduced, perhaps to 2.5% or even zero in some cases, e.g. retiring to Portugal.
Each case is unique. QROPS rules change every year, but they are locked in under the rules. You can lock in present rules by transferring today. Ask us for a transfer value analysis.The Budget 2015 and QROPS by Richard Malpass