QROPS was originally envisaged as a means of applying a quality standard test for those moving abroad and taking their pension with them, and there will remain a place for them when moving to a new country of residence, subjecting the pension to that country’s rules and currency.
Increasingly, the use of QROPS became an opportunity for some to free themselves from the shackles of UK pension rules. Of course, this meant waiting until the QROPS was outside the 10-year reporting period. But their appeal for expats and anyone planning to retire overseas has been greatly diminished following the introduction of new freedom and choice in pensions and the scrapping of the 55% death tax charge.
Flexible income choices
The UK pension rule book is being ripped up. From next April, defined-contribution (DC) pension holders will have complete flexibility in accessing their pension. Those looking for full flexibility will have four new options, including the uncrystallised funds pension lump sum (UFPLS):
Full flexi-access drawdown – take all tax-free cash and designate the remaining (crystallised) funds as a drawdown income pot for flexible unlimited access.
Phased flexi-access drawdown – take some tax-free cash, designate the attaching (crystallised) income pot for flexible unlimited access and leave the remaining (uncrystallised) funds as a savings pot.
Full withdrawal, no drawdown (UFPLS) – take the entire pot in one go, with 25% tax-free and the remainder taxable.
Phased withdrawal, no drawdown (UFPLS) – take some of the pot in one go, with 25% of what you take tax-free and the remainder of the phased withdrawal amount taxable, leaving the remaining funds uncrystallised.
Options one and two simply extend flexible drawdown to the masses, without any secured minimum income requirement. Options three and four just add other ways of accessing pension savings in chunks. All look radically new, yet strangely familiar (UFPLS has always been possible under flexible drawdown).
Have your cake and eat it
If the new terminology feels a bit confusing, think of the pension fund at retirement as a cake, with the sponge the taxable bit and the tax-free cash the icing on the top.
Full withdrawal (option three) means you eat all the cake in one go, made up of tax-free icing and taxable sponge.
Phased withdrawal (option four) means taking a slice of cake and applying the same rule as above to your slice, with the remainder of the cake uncrystallised.
Full flexible drawdown (option one) means you eat the tax-free icing from
the whole cake and leave the taxable sponge (accessed under drawdown) for another day, which will be deemed crystallised.
Flexible drawdown (option two) means you cut into the cake and take a slice out, but you only eat the tax-free icing, leaving the taxable sponge of your slice for another day, which is accessed under drawdown. The remainder of the cake (less the slice) stays uncrystallised, until you cut into it again in the future.
This removes the shackles from how income can be taken, and overseas residents may be able to have their income paid gross subject to the relevant territories’ double taxation agreement with the UK. In such cases they will simply declare their pension wherever they are resident and no UK tax is charged.
However, it is likely that measures will be put in place to prevent someone from becoming temporarily non-UK resident and drawing all their pension income free of UK tax before returning to the UK on a permanent basis. Rules already exist to prevent temporary non-residents from escaping UK tax in this way under flexible drawdown.
Death of the 55% tax charge
Greater freedom on retaining pension wealth for family members on death has been a key factor behind many expats’ decision to move their UK pension savings into a QROPS. A potential 55% tax charge on drawdown lump sums paid after the age of 75 or from crystallised funds has penalised those who have only drawn sensibly on their pension savings and restricted what can be passed on to future generations. But that is changing, too.
New UK death benefit rules
Age at death will still determine how pension death benefits are treated. The age 75 threshold remains, but with some very welcome amendments.
Death before 75 – the pension fund can be taken tax-free at any time, whether in instalments or as a one-off lump sum. This will apply to both crystallised and uncrystallised funds, which means those in drawdown will see their potential tax charge on death cut from 55% to zero overnight. Using the fund to provide beneficiaries with a sustainable stream of income allows it to continue to grow tax-free in the pension wrapper, while remaining outside the estate for inheritance tax.
Death after 75 – DC pension savers will be able to nominate who inherits their remaining pension fund. This fund can then be taken under the new pension flexibility and will be taxed at the beneficiary’s marginal rate as they draw income from it. Alternatively, they will be able to take it all as a lump sum less a 45% tax charge (this will become their marginal rate from 2016/17).
The table (below) shows changes for death benefits paid after 6 April 2014.
Death before age 75 offers the option of a tax-free lump sum but it also allows the fund to remain within the pension wrapper, to which the beneficiaries would have flexible access. Nominating a family member to take over the flexible pension pot is likely to become a popular choice when death occurs after this age.
These changes will standardise the death benefit treatment for the different flexible income options from next April. There will not, for example, be any difference between taking phased flexi-drawdown or phased withdrawal, as crystallised and uncrystallised funds will be treated the same on death.
The new rules will not only significantly reduce the tax charge – for many removing it completely – but will also extend who can benefit from the income from just dependants to anyone.
And, while some QROPS outside their reporting requirements have been able to pay death benefits free of UK tax, this has been restricted to beneficiaries who are resident outside the UK. This has been an issue for the many oversees retirees whose children have remained a UK resident.
All eyes on 3 December
It is worth stressing that more detail is awaited, particularly on the operational elements of how the new rules will work in practice. The next step is to see the full details in the Autumn Statement on 3 December. This should also include any consequential changes to supporting legislation, such as the QROPS and temporary non-residence rules. We should then see the final pieces of the UK pensions reform jigsaw.
A picture will start to emerge as to whether any tax benefits remain for those considering transferring to a QROPS in a third-party territory and if those associated charges and possible less robust investor protection outweigh any potential tax savings. What is already clear is that the new UK pension rules look far more attractive, whether you are planning to retire in the UK or overseas.
Summary of changes for death benefits paid after 6 April 2014
| Death pre-75 | Old Rules | New Rules |
| Lump sum |
Crystalised funds – 55% tax. Uncrystalised funds – tax-free. |
All tax-free. |
| Income |
Option only available to dependants. Taxed as income. |
Tax-free if taken via new flexible income. Option available to any beneficiary. |
| Death post-75 | Old rules | New Rules |
| Lump sum | Subject to 55% tax. |
Subject to 45% tax. (marginal rate from 2016/17) |
| Income |
Taxed as income. Option only available to dependants. |
Taxed as income. Option available to any beneficiary. |
