Choosing a QROPS or SIPPs may at first appear a difficult decision especially following amended UK pension rules which came into force on the 6th of April 2015. This is not helped when there is a lot of conflicting and occasionally inaccurate information available. A key point to bear in mind is that any generalised information may not apply to your circumstances so it is important to be fully informed. To help you ascertain which route will provide the best pension for you we will breakdown the differences.
Since the rules between UK pensions and QROPS differ so much the following table shows a potential comparison between the two. Please note, there can be wide variances between the regulations of individual jurisdictions. As a result, no one jurisdiction is right for everyone. Below is a generalised difference between UK SIPPS and QROPS. It must be noted that not all QROPS providers may offer the benefits highlighted below and, in the same manner, not all SIPPS providers will necessarily provide all the advantages potentially afforded to them by their rules.
|Acronym stands for||Self Invested Personal Pension||Qualifying Recognised Overseas Pension Scheme|
|Introduction dates||1989||6th of April 2006|
|Rules||UK pension rules||QROPS pension rules & local pension regulations|
|Jurisdiction||UK||World excluding UK|
|Minimum retirement age||55||55|
|Tax free lump sum||Up to 25%||Up to 30%|
|Income & capital gains tax||0%||0%|
|Tax on withdrawals||UK rate + rate where you reside||0% + rate where you reside|
The specific rate of tax that you will be liable for will depend upon the country where you reside when funds are withdrawn from your pension. This is irrespective of whether you hold QROPS or SIPPs. For a SIPP any tax that is due in the UK may be reclaimed via an appropriate Double Taxation Agreement (DTA) with your residing country. If a DTA does not exist then you will be liable for tax in both countries. The DTA will stipulate the amount of UK tax that can be recoverable, which country you apply for relief, and the country you pay tax in. Please note, not all DTA agreements cover pension payments.
QROPS, like SIPPs, are also subject to tax on withdrawals in the jurisdiction where they are based and the country where you reside subject to any DTA agreements in place. In extreme situations this can result in no tax being due.
The way a QROPS benefits over a SIPP is that the best jurisdiction for you can be selected. This will allow tax to be minimised by either choosing a QROPS location which holds a DTA with your intended retirement destination or, if preferable, one that has a very low rate of tax. The latter is typically applied where your retirement destination holds no appropriate DTAs
|Death tax due||Up to 45%||0%|
|Avoid death tax||Yes, keep pension invested||Not liable for tax|
|Inheritance tax||Usually no – death tax liable instead **||0% **|
|UK beneficiaries entitled to tax rebate on death benefit||No **||25% – 81.88% **|
On death, any remaining pension proceeds are potentially liable for death duties and inheritance tax (IHT) in the jurisdiction where it is based. Furthermore, IHT may also be due both in the country where the deceased was resident and for any beneficiaries as well. For QROPS, the jurisdictional tax rate for both IHT & death taxes is 0% in a lot of instances. Proceeds will then be paid out to the beneficiaries. For SIPPs, any remaining proceeds will not go into the deceased’s estate for IHT purposes in most cases.
In relation to a UK beneficiary of QROPS’ proceeds inheritance tax would potentially be due if the amount received exceeded the person’s current IHT threshold (£325,000). This tax could be nullified by using a trust therefore it is very feasible for no tax to be paid irrespective of the size of pension.
Since this money is freely available to be used how the beneficiary wishes they could use it to enhance their existing pensions. Based on current rules that means a minimum tax rebate of 25% for lower rate tax payers up to 81.8% for additional rate tax payers (each £80 & £55 respectively would be topped up to £100).
This is subject to the deceased having been a non UK tax resident for 5 full tax years and annual pension contributions not exceeding either the individual’s annual gross income or their personal annual allowance, whichever is smaller.
Technically, the same could apply to UK pensions under the assumption that you know you will die before 75 and that the pension rules do not cancel this anomaly
|Returning to the UK;|
|Rules||UK pension rules||UK pension rules|
|Tax free lump sum||25%||25%|
|Remaining income taxed||Taxed on 100% of withdrawals||Taxed on 90% of withdrawals|
|Additional tax due||Yes – based on temporary non-residence rules ***|
If you return to the UK then any income withdrawn from your pension in the previous 5 years (or 5 full tax years if you left before the 6th of April 2013) is liable for tax. All income taken within that period will taxed accordingly as if the money was withdrawn from a uk pension on day 1 of your return. There is, however, an exclusion for anyone who withdrew £100,000 or less within the fully adjudged time period.
Any tax already paid may potentially be offset dependent upon any relevant double taxation agreements (DTA) in place
|Double Taxation Agreements (DTAs)||137 ****||Dependent upon jurisdiction|
Pension income may be excluded from certain treaties. Also, a lot of the most sought after retirement destinations are conspicuous by their absence including Ecudor, Costa Rica, and the UAE. This could result in income tax being paid twice, both at the UK and your retirement destination’s rates.
A QROPS, by comparison, will either enable you to find a location that holds an appropriate DTA with your retirement destination to allow income to be paid in full (gross) or, alternatively, there is the option of selecting a low tax rate jurisdiction to enable the amount of tax paid to be minimised
|Lifetime allowance tax charge||Assessed at each benefit crystallisation event (BCE)||Assessed at point of transfer only|
|Potential for LTA to be reassessed||Yes||No|
|Tax charge for exceeding LTA||55% or an additional 25% tax on regular payments||25%|
|Fund flexibility||Access to 100% of pension (excludes defined benefit schemes)||Access to 100% of pension|
|Accept final salary pension schemes||Yes excluding unfunded schemes|
|Defined benefit pensions, of which final salary plans are one variety, must be signed off by UK financial adviser who is suitably qualified. Liberty Wealth are able to provide this service to our clients|
|Accept defined contribution transfers||Yes||Yes|
|Certain pensions cannot be transferred in either case including those that have already been used to purchase an annuity, final salary schemes currently paying benefits and the UK state pension|
|Costs||Dependent upon provider|
|Which is best||Depends on your circumstances|
* UK rules will continue to apply up to 5 full tax years from you no longer being a UK resident for tax purposes
Please note, both QROPS and SIPPs are only an administrator who ensure pension rules are adhered to and that the relevant reporting to HMRC, or other relevant authorities, occurs. They do not, in themselves, allow you to trade or transfer any investment. For this, you will require a form of trading platform which will allow you to perform these activities and this may be supplied by the same provider as your SIPP/QROPS. Depending upon the provider the investment choice may be restricted and costs will vary. There are numerous potential charges that exist including setup, annual management and dealing fees. Every investable SIPP and QROPS have these charges, even if they are zero, so it is important to establish what they are. Due to the opaque nature of some providers fees it can make comparison time consuming and difficult. The most important factor when considering charges is their value. A QROPS may cost more than a SIPP but if its advantages are sufficient then it will be more valuable. The same applies for investments and comparisons between different SIPPs
For everyone else, you should ensure that you speak to an independent financial advisor who has experience with QROPS/SIPPS and who clearly explains all the costs involved, the benefits and the drawbacks. Importantly, you should receive tailored information based upon your circumstances following an in depth discussion about your goals, expectations, and priorities