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|QROPS, A get of jail free card for your pension?|
Legislation introduced in April 2006 gave the ability for a UK pension to be transferred to an overseas pension PROVIDING it meet certain qualifying rules. These rules were to ensure the overseas pension broadly followed the UK legislation. This obeyance to the UK rules was seen as a justification for having given UK tax relief on payments into the pension scheme in the first place.
QROPS or Qualifying Recognised Overseas Pension schemes can give several benefits to the individual expat. For the first 5 years of the new pension the trustees of the new pension scheme have to report once a year to the UK Inland Revenue to confirm continuing qualification with the rules. After 5 years the reporting requirement falls away and if the pension is then moved there is no requirement to report to the UK and no loss of UK tax relief. It is therefore possible to transfer your fund to another investment which does not require you to purchase an annuity.
Why is not purchasing a pension annuity a good idea?
A pension annuity means that you give your capital, the amount that you have built up in your pension less any tax free cash you are allowed to tax, to an annuity provider who will guarantee you a lifetime income (your pension), no matter how long you live. There are pros and cons to this. You know how much income you are going to get and you know you will get this for life. Unfortunately, the amount of interest you get reflects interest rates. The current low levels of interest rates have meant many people have had smaller pensions than they might have hoped for.
The thing that people hate about annuities
Unfortunately, when you buy an annuity your capital is gone for ever. This is the trade off for getting a lifetime income. It is why pensions are given tax relief because the State (applies to many countries, not just the UK) know that you cannot "squander" your hard earned pension fund, you have to be given an income. This helps reduce your dependency on the State.
Is this why QROPS are so popular?
After 5 years of membership of the scheme it is possible to move your pension fund into an alternative investment where you do not have to buy an annuity. The example below shows why QROPS are so popular with people.
This is a very simplified example. There are many more factors to take into account yet it does show that it is possible to leave a significant legacy to one's family with this option. It is also no coincidence that all the great families, be they British, Catalan or Spanish, take into account "family" financial planning to leave as much as possible to their heirs. This includes, unsurprisingly,
many families of politicians!