QROPS offer some significant advantages which no other type of pension scheme can. The main benefits are outlined below.
1. Remove the requirement to buy an annuity
Historically, 75% of a British pension pot had to be used to buy an annuity – which provides guaranteed income for the rest of your life.
The downside is yields are low, subject to income tax, and when you die, your pension fund dies with you.
Many outdated pensions automatically default into an annuity at a given time.
But by transferring your UK pension into a QROPS, this danger is avoided, and upon death any funds that have not been used to provide you with income is passed onto your loved ones.
2. Easily pass on wealth
As you nominate your beneficiaries when you transfer your fund into a QROPS, passing your wealth onto your loved ones is usually easier, faster and less stressful for your family than with a UK pension.
Yet, when it comes to passing on your wealth with a QROPS, there is another, huge benefit:
3. Avoid inheritance taxes of up to 45%
Even if you are resident overseas, if HMRC can establish Britain was the country you regarded as home at the time of your death, your UK pension would be subject to death tax.
UK pension funds being passed onto beneficiaries will incur an tax charge of 45%. However, this deduction does not apply to QROPS; where your funds can be passed onto your loved ones free from tax at source.
4. A tax-free lump sum of up to 25%
Many QROPS allow up to 25% as a tax-free lump sum.
5. Increased income drawdown and greater flexibility
If you transfer your UK pension into a QROPS, when you have been a non-resident of the UK for five years, you can take advantage of significantly more flexible income drawdown rules.
The drawdown amount on UK pensions is calculated using the Government Actuarial Department (GAD) rates. These rates are currently at their historical lowest.
With a QROPS, the jurisdiction’s rules allow the trustees to use a different calculation then the UK GAD. This can allow for income to be up to 50% greater than a UK pension.
A QROPS will also avoid UK income taxes which typically range from 20% to 50% depending on how large your fund is.
6. Greater investment freedom
One of the most significant ways in which QROPS are superior to UK plans is in their investment choice – which is usually very wide indeed.
To situate the differences, UK stakeholder pensions have low investment charges, but tend to offer a limited choice of funds. Conversely, traditional UK personal pensions tend to offer a wider choice of funds than stakeholder schemes, but can carry hefty charges, particularly on older, outdated plans.
What you may not know is that both these UK pensions are usually run by insurance companies. This means you are only investing in a small selection of funds that are either run by the insurance company itself – or that it has a vested interest in.
So if you wish to escape from mediocre performance, the cripplingly high fees of UK pensions and take control of your future, a QROPS cannot be ignored.
A world of choice
QROPS also offer the widest possible choice of investments, allowing you, your financial advisor or investment manager to pick from a range of asset classes across the global market.
This includes collective investments trusts, stocks and shares, gilts and bonds, cash, and even commercial property.
There is also no limit to the size of funds a QROPS can hold, meaning when you have transferred your fund, you can continue to grow it as you see fit.
What’s more, both your contributions and the fund itself can grow free from capital gains tax.
7. Tax efficiency
Many countries impose lower taxes on income than the UK; including on pension income.
Depending on where you live, you can therefore receive income from your retirement fund at substantially lower tax rates.
Therefore by transferring your UK pension into a QROPS a higher income – and a dramatically more comfortable retirement – can be achieved.
An experienced financial advisor can explain this in depth, ensure that 100% of your fund can be passed to your beneficiaries, and help you to plan for your succession.
8. Avoid currency exchange rate fluctuations
A UK pension pays out in sterling regardless of where you live, so you face complicated timing issues to make the best of changing currency rates.
In addition, investing in international funds can add costs due to currency conversion.
However, because a QROPS can invest and pay out in most major currencies, you:
- reduce the effect of exchange rate fluctuations,
- avoid the hassle of timing transfers to get the best rate, and;
- choose your FX broker to receive the best rates.
9. Flexible base
By transferring your UK pension into a QROPS your scheme can either take advantage of the tax rules where you live – or a different low-tax jurisdiction which has increased benefits.
For individuals who might move between countries, or are moving in the future, multi-jurisdictional schemes are also offered by some providers. They allow your QROPS to move between jurisdictions – meaning you can maximise your fund’s efficiency without additional charges.
10. Transparent charges
In a similar vein, one of the main disadvantages of UK pensions concerns confusing charges found in outdated schemes. When these charges come into effect they can put a serious – and wholly unexpected – dent in your retirement.
By transferring your UK pension into a QROPS however, your advisor can clearly outline the applicable charges so you can see exactly where your money is going – a factor strengthened by the fact UK pension charges are usually percentage based whilst QROPS enjoy a fixed fee.
11. Consolidate multiple pensions into one easy to manage scheme
With a QROPS, you can consolidate any number of UK pension funds into one larger, easier to manage plan.
This allows all your hard earned pensions to benefit from improved investment choice, and overall you will save on charges and maximise growth.
You also benefit from having one plan for all your retirement provisions, and one point of contact; making managing your retirement fund much easier.
12. No Lifetime Allowance (LTA) charge
In the UK, there is a lifetime allowance (LTA), which sets a limit on the amount of tax relief you can receive before additional taxes. Currently pegged at £1.5 million, it is scheduled to fall to £1.25 million for the 2014/15 tax year.
This applies to all your pension savings. So, if your total pension fund exceeds the LTA, you could be hit with a tax charge on the excess.
However, if you transfer your fund into a QROPS you will not be taxed – even if your fund grows beyond the LTA after the transfer.
Please note, if your UK pension is above the LTA and you transfer into a QROPS there will be a tax charge.
13. Avoid further changes to UK tax and pension legislation
Leading on from this, once in a QROPS, your fund is safe from the ever-changing rules and regulations in the UK.
This includes the possibility that before long, the ability to transfer your fund into a QROPS could itself be scrapped, and that the LTA will be reduced still further.
You can use the ‘Contact an Advisor’ on the right of this page for more information on QROPS benefits.