Andy Zanelli looks at the distinctions between both pension schemes, and how they can be used in retirement planning
I am now going to show my age, but I hope many of you reading this will be able to identify with what I am about to say!
When I was younger, I remember seeing a number of vehicles that had a "Q" number plate and always wondered why. I subsequently found out that a Q plate, in this case, meant that the car was a kit car.
If you Google "Q number plate", a couple of interesting quotes come up: the "Q" shows that the vehicle was either not originally registered in the UK and proof of age was unavailable at registration, or that it has been built using a significant proportion of used parts.
Kit cars usually have a Q registration, and this is perfectly normal. But on other vehicles, it suggests their full history may be difficult to trace. Before you purchase a vehicle with a "Q" plate, it is important that you obtain a HPI check to ensure that it is not stolen or "ringed", and is registered with the DVLA.
Not an exact analogy to the world of QROPS and QNUPS, but there is a distinct similarity. The point I am making is that this is a very specialist area of pension planning and expert advice should be sought before any action is taken.
The area of Qualifying Recognised Overseas Pension Schemes (QROPS) is one that has been with us for a number of years, as the legislation was included within various sections of the Finance Act 2004.
The arrival of Qualifying Non-UK Pension Schemes (QNUPS) is a much more recent development and one where another level of understanding is required. Principally, the problem is that while all QROPS are by definition also a QNUPS, a QNUPS can exist on its own without having to be a QROPS.
Prior to 6 April 2006 (A-Day), certain non-UK pension schemes were protected from the UK inheritance tax (IHT) regime. It is fair to say that while the A-Day changes attempted to simplify the legislation that underpins the UK framework for pensions, a number of omissions were made. It has taken a number of years to address these issues, and a great deal of amending legislation and statutory instruments. This is still ongoing.
The A-Day regulations omitted the protection from UK IHT for certain non-UK pension schemes which meant that UK pension funds would be liable to IHT when transferred to a QROPS.
The Inheritance Tax Regulations (2010), which came into force on 15 February 2010, solved this problem and at the same time created another pension phenomenon: QNUPS.
With all of the recent changes to the UK pension regime - such as anti-forestalling, removal of the need to annuitise at age 75, reduced annual allowance, reduction in the lifetime allowance - the arrival of QNUPS may have sneaked in under the radar.
With QNUPS not having the same level of regulation applied to them as QROPS, it is worth considering some of the main differences.
For a QROPS, there are some stringent reporting requirements. This includes any payments and transfers in respect of members that:
- are resident in the UK when the payment is made (or treated as made) or
- although not resident in the UK at that time, have been resident in the UK earlier in the tax year in which the payment is made (or treated as made) or in any of the five tax years immediately preceding that tax year.
Thus, events such as payment of cash, income, death benefits or transfers out are all reportable to HMRC until the individual has been a non-UK resident for five complete tax years. Reports to HMRC include the individual's name and address.
With respect to any reporting requirements, a QNUPS does not have to fulfil these, so no details have to be provided to HMRC at any time.
While further contributions are allowed to be made with a QROPS, and there are reasons why many people (even UK resident) may wish to consider this, the question could be asked: "Why would you?"
If contributions are made to a QROPS, then the reporting requirements are in place for any payments made in the circumstances outlined above. In addition, death benefits, potential investments and the level and taxation of income could be restrictive, as I will come on to later.
If contributions are made to a QNUPS, then these QROPS restrictions need not apply. Contributions would not attract UK tax relief, which means the investor does not have to have relevant income.
In saying that, most of the major QNUPS providers require that contributions must be seen as proportionate for an individual, taking into account overall wealth and what is necessary to provide them with appropriate levels of benefit in retirement.
This is one of the major differences, as a QROPS can receive a transfer from a UK-registered pension scheme and it will not be treated as an unauthorised payment.
Great care should be taken at this point, hence the opening of my article, as HMRC appears to be taking a keen and active interest in QROPS.
For the majority of clients looking to use QROPS - and for the major providers, this is not a real issue - it is worth noting that we have seen recent HMRC attention in respect of certain Singapore and Hong Kong QROPS which tested the "spirit" of the underlying legislation.
There are diverse views in the market as some would argue that until the member has been non-resident for more than five complete tax years, there is little to gain from QROPS for a UK resident.
The major providers will not accept a transfer from a UK resident individual who cannot demonstrate intent to move overseas, so it could potentially be a market primarily for the internationally mobile and expat prospects.
A transfer from a UK-registered pension scheme directly to a QNUPS would be regarded by HMRC as an unauthorised payment, and tax charges could apply as a result. Any transfer business would need to come from an international pension or a QROPS.
Transfer into a QNUPS from a UK scheme would be achievable only by transferring to a QROPS first and then transferring to the QNUPS once the individual has been non-resident for five complete tax years.
A note of caution here: if any of the fund is derived from employer contributions, a potential tax charge will be made as part of the disguised remuneration regulations.
Income and death benefits
Any income paid in respect of a UK resident or an individual still within the reporting period for the QROPS would use 100% of the 2011 GAD tables. When the income is paid and the client is outside of the reporting period, it can be based on 120% of the 2006 GAD table.
If any income is taken from a QNUPS, it will be based on 120% of the 2006 GAD table irrespective of the status of the client. This could be advantageous, and a further difference for a QNUPS is that if the income is subject to UK tax, only 90% of it is taxable (according to section 575 ITEPA of the Income Tax (Earnings and Pension) Act 2003).
As for death benefits, a QROPS will provide a 100% return of fund for any uncrystallised benefits, as well as any crystallised benefits that are outside of the reporting period. For death benefits in respect of crystallised funds still within the reporting period, there will be a 55% return of fund.
Due to the reporting requirements not applying to a QNUPS, any death benefits arising will be available as a 100% return of fund.
In a QROPS, the investments can be more restrictive in the reporting period under the qualifying rules. However, this may be relaxed after the client has moved outside this timeframe.
A QNUPS has the potential for a wider investment choice. This may include some types of residential property and the ability to provide loans to a member. It is early days, but this could well be one of the areas where HMRC takes a keen interest in QNUPS to ensure that the "spirit" of the legislation is applied.
This article is, in no way, an attempt to position either a QROPS or a QNUPS as the right vehicle for any potential client. Its purpose is to highlight some key differences of the slightly lesser-known QNUPS against the more widely established QROPS scheme.
I will go back to my thought right at the start which is that this area of planning within the overseas pension market is highly specialised and requires experienced advice. When dealing in this area, there are potentially four pillars of tax and jurisdictional knowledge required:
- the UK
- the QROPS/QNUPS jurisdiction
- the jurisdiction of residency
- the future jurisdiction of residency.
With HMRC showing a keen and growing interest in this market a clear knowledge of the client, some specialist advice and the use of an experienced and reputable provider should ensure that the right "Q plated" vehicle is selected.
Andy Zanelli is head of technical sales at AXA Wealth
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