Saturday, February 29, 2020

Can I take a 30% tax-free lump sum from a QROPS?

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Many retirement savers are confused over the tax-free lump sum they can take from their Qualifying Recognised Overseas Pension Scheme (QROPS).

Many financial firms advertise that a 30% tax-free lump sum is available – which it is, but only from providers and financial jurisdictions.

With around 1,000 QROPS on the market across more than 40 financial centres, if maximising your tax free lump sum from a QROPS is a priority, then you need to choose your offshore pension carefully.

HM Revenue & Customs (HMRC) sets out a blueprint for how a QROPS is set up on a global basis, but local providers also follow rules set by their regulators.

The HMRC rules demand that providers should protect ‘at least’ 70% of any tax relieved funds transferred into a QROPS from a UK pension, and that this cash must provide a pension for life for the QROPS investor.

Which QROPS offer 30% tax free lump sums?

The key wording is ‘tax relieved’ funds.

Because HMRC does is specific about the cash that is protected by the provider, the scheme can take a more liberal interpretation of what to do with the rest of the fund.

UK law allows retirement savers to take a 25% tax-free lump sum from their scheme when they reach the minimum pension age of 55 years old. The same rule applies to QROPS members, but some jurisdictions let them top that 25% up to 30% by adding money from the fund growth.

As the fund growth does not come from tax relieved funds, the provider is at liberty to do this if they wish.

Some QROPS centres offering 30% lump sums include Malta, Gibraltar and the Isle of Man.

QROPS flexible access

Flexible access pension freedoms also affect the 30% QROPS tax free lump sum.

Currently, HMRC has a ban on QROPS outside Europe offering flexible access.

This ban means every non-European QROPS provider must protect that 70% of tax relieved contributions, whether they are received from another QROPS or from a UK pension.

Within Europe, QROPS providers in Malta are free to allow flexible access on the same terms as UK pension schemes – while those in Gibraltar, Guernsey and the Isle of Man have indicated that they plan to follow suit soon.

To date, only one QROPS provider in Malta offers flexible access.

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