I have previously extolled the virtues of transferring UK pension benefits to a qualifying recognised overseas pension scheme (QROPS), but recent developments have made this route even more attractive for certain individuals. QROPS can be based in a variety of jurisdictions, with the most popular to date being Guernsey. However, late last year, the Isle of Man (IoM) passed completely new legislation, which has propelled it to the QROPS A list.

QROPS are aimed at those who have already, or expect to become, non-UK tax resident. There is, however, no actual requirement for a pension scheme member to become non-UK-resident, although most QROPS providers do not want to be seen to actively promote their scheme to UK residents. Although the greatest tax savings are provided to those who become non-UK-resident, there are also very attractive benefits for those who find themselves UK-resident again, or who never actually left!

If you transfer UK pension benefits to an IoM QROPS that is classed as a '50C' type scheme and have been non-UK-resident for at least five complete tax years, then you could take a lump sum from age 55 of 30% of the amount transferred plus 100% of the fund growth.

For example, Owen transfers his SIPP valued at £400,000 to an IoM QROPS when he is aged 40 and becomes non-UK-resident shortly afterwards. By the time Owen reaches age 60, his QROPS fund has grown to £1.2m. Owen takes a lump sum of £920,000, leaving only £280,000 to provide an income. Had Owen left his benefits in his UK SIPP then the maximum lump sum would have been £300,000 (£1.2m ž 25%).

If you registered for enhanced protection for your pension fund as at 6th April 2006, then your UK pension funds are not subject to the lifetime allowance. However, your lump sum entitlement is highly likely to be restricted to 25% of the current lifetime allowance, i.e. £375,000 from 6th April 2012 (£1.5m ž 25%), even if you are non-UK-resident. By contrast, this restriction does not apply to the IoM '50C' QROPS for those who are non-UK-resident.

Michael is 50 and has a UK SIPP worth £2m that benefits from enhanced protection but not lump sum protection. Michael decides to transfer his SIPP to an IoM QROPS. There are no tax implications at this stage. Michael decides to take benefits from his QROPS when he reaches 65 and is still non-UK-resident, by which time the fund has grown to £4.2m. Michael may take a lump sum from his QROPS of £2.8m (this is 30% of the £2m transferred to the QROPS plus 100% of the £2.2m growth on the transfer within the QROPS). This compares to a maximum lump sum of £375,000 had Michael left his pension in the UK and the lifetime allowance remained at £1.5m.

If you die while you and any beneficiary are non-UK-resident for at least five tax years, then the entire QROPS fund is paid without a tax charge. This compares to a 55% charge levied on lump sum death payments for those drawing pension benefits or those who have reached age 75, whether they have drawn benefits or not.

UK pension plans are subject to a tax charge on benefits in excess of the available lifetime allowance. This is 25% if taken as a taxable income or 55% if taken as a lump sum. If you transfer your UK pension to any type of QROPS then the fund value is only tested at the time of the transfer and not when you come to take benefits. Therefore, if you think it likely that you will achieve investment returns which will cause your fund to grow beyond the lifetime allowance (which is more likely for those with longer time horizons and higher exposure to risky/growth assets), then transferring to a QROPS will enable you to avoid a future lifetime allowance tax charge.

If you have been non-UK-resident for at least five tax years but you envisage returning to live in the UK, then you can benefit from the higher lump sum entitlement and drawdown income referred to earlier, as long as you commence these before you return to the UK. If you draw the lump sum when you are UK-resident, however, you will be restricted to 25% of the fund value.

If you have transferred your UK pension fund to a QROPS, then whether you are UK-resident or not, your fund cannot be tested against the lifetime allowance again, as the transfer is treated as full crystallisation for these purposes (benefit crystallisation event number 8). This means that any excess over the lifetime allowance will avoid the lifetime allowance charge. Be careful, though, if your UK pension holds UK property, because transferring to a QROPS can cause withholding tax to be levied on rental income unless you use an offshore company structure to mitigate this.

If you are UK-resident and die with a QROPS or a UK SIPP fund that is providing benefits (lump sum or income) or are aged 75+, regardless of whether benefits are being taken, then your fund will be subject to a 55% tax charge. However, with the QROPS, the 55% tax charge only applies to the initial transfer value paid into the QROPS, not any subsequent growth. For example, Shirley transferred her UK pension worth £1.6m to a QROPS and after several years it had grown to be worth £2.5m. Sadly, Shirley died when she reached aged 75. The tax charge payable was £880,000, being 55% of the amount transferred to the QROPS. This compares to £1.375m (55% of £2.5m) that would have been payable had Shirley retained her UK pension.

Regardless of your residence status, an Isle of Man QROPS will also permit a much higher level of income drawdown than would be possible with a UK scheme as it does not have to use annuity tables prescribed by the UK's Government Actuary's Department (GAD). In addition, a QROPS enables the fund and retirement benefits to be denominated in the currency of choice, rather than just sterling, which will be important if your lifestyle costs are incurred in another currency.

 

In summary, an IoM QROPS, which is based on the new IoM pension legislation, offers the following key benefits:

QROPS are here to stay and as long as they comply with both the letter and spirit of UK and European pensions and other legislation and are in stable and well-recognised jurisdictions, they offer legitimate benefits to those with UK pension benefits. Ideally, you need to have at least the intention of retiring abroad, although it is not a requirement for transferring to a QROPS. If you decide to return (or remain) in the UK, the benefits of a QROPS can still be significant, depending on your circumstances. The key to making good decisions in this area is to take a 'big picture' view of your financial situation, including your lifetime cash-flow needs, future desired lifestyle, investment strategy and legacy intentions. QROPS are not a panacea but they are a very useful tool in your wealth-planning armoury!