How QROPS help British expats avoid the lifetime allowance limit

How QROPS help British expats avoid the lifetime allowance limitChancellor George Osborne’s recent decision to reduce the Lifetime Allowance from GBP 1.5 million to GBP 1.25 million came as little surprise to the UK public.

The second reduction in as many years means doctors, teachers, private sector managers and many other professionals across the UK who have either already built up a pension pot over GBP 1.25 million – or will have be the time they retire – will have to pay additional, hefty taxes.

The current lifetime allowance rates mean you will either be charged 25% on your income, or 55% to be taxed as a lump sum.

And with the reduction being introduced next April, time is of the essence if you wish to protect your fund.

Yet there is another reason that timely action is needed; with many experts speculating it may not be long before the Lifetime Allowance is reduced further – perhaps to GBP 1 million.

So what exactly are the options for those who have either hit their lifetime allowance limit, or are about to do so?

The two options

The first would be to leave your pension fund in the UK, and crystallise the equivalent of the lifetime allowance.

However, this options means any remaining funds over the lifetime allowance limit would eventually incur a tax charge upon reaching 75 years of age.

This means you would either begin losing 25% of your pension income, or see 55% of your fund taken as a lump sum penalty charge.

The second option is to transfer your fund into a QROPS, which is seen as a benefit crstallation event.

This means after the transfer, your fund will no longer be “tested,” and therefore exempt from the lifetime allowance limit – even if your pot grows over GBP 1.25 million at a later stage.

Transferring your pension pot into a QROPS therefore allows you to continually build your pot as you see fit, without penalty.

In addition, as QROPS are specifically designed for British pension holders living overseas, they bestow many other specific advantages, such as the ability to receive your pension income in the currency of your choice.

Worked example

If you owned a pension currently worth around GBP 1.2 million, and expect to continue to contribute to the fund – or witness an increase as a result of successful investments – you would be in danger of exceeding the new limit come April 2014 and paying the tax charge on the excess.

But if you transferred into a QROPS, your pension would not become subject to the tax allowance charge come April.

In addition, if you fund grows over the lifetime allowance, no lifetime allowance will be charged – however large your fund grows.

An additional benefit also applies upon death.

Assuming you left your pension in the UK, upon death 55% of the fund would be lost to the UK’s heavy ‘death taxes.’

By transferring your fund into a QROPS however, you would face one of two more attractive options.

If an individual dies within five years of transferring their fund into a QROPS, the 55% death taxes would only apply to the total transferred amount – less any withdrawals that had been taken.

This means any growth the fund experienced over the initial transfer amount would remain protected, and be passed onto loved ones untouched.

Yet if the individual dies after five years – and thus, following HMRC guidelines begins to adhere to the rules of the QROPS jurisdiction and not UK tax laws – there will be no British taxes to pay on the entirety of your fund.

To speak to an independent financial advisor about how the QROPS legislation can help you, please use our contact form.

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