Scrapping the need to buy an annuity for pension savers has set off a scramble to keep retirement funds under the control of UK investment firms running self-invested schemes.SIPPs (self-invested pension plans) are popular with hands-on pension savers, especially those who can switch ownership of business premises into the fund. One of the drawbacks was the pension scheme member had to buy an annuity before the age of 75 or face swingeing tax penalties. This requirement is scrapped.
Many onshore pension firms now claim this gives parity between SIPPs and QROPS for an expat or other offshore pension savers. A QROPS is not necessarily the best pension option for every expat, but regardless of the government ditching annuities, a QROPS still outguns a Sipp in many areas:
Tax-free lump sum withdrawals
New tax law changes in the Isle of Man and Guernsey should let some QROPS investors take up to 30% of their fund as a lump sum without tax - and in New Zealand, some investors could take even more. A Sipp generally allows a 25% lump-sum withdrawal.
Currency exchange fluctuations
A Sipp is designed for the UK pension market and generally pays benefits in Sterling, which can mean scheme members suffering a loss on currency exchange rates or having to time their transfers to minimize bank costs. QROPS payout in a variety of currencies - including Euros and US dollars.
Scope for investments
The same HM Revenue and Customs rules apply to pension fund investments for both pension schemes - except QROPS scheme managers have the flexibility to invest in a wider range of markets and currencies than their Sipp counterparts.
Estate planning issues
A QROPS automatically places any unspent pension funds outside of UK jurisdiction for inheritance tax - pension providers are waiting for final clarity on the taxation of unused Sipp funds, but at this time, only funds that are not subject to paying any benefits look to escape IHT. Speak to Qrops.net for further information about this area.
SIPPS Vs QROPS
Before you can decide whether to take a SIPPs or QROPS pension plan, you need to answer some key questions:
• Do you have UK pension rights? If you are resident in the UK or have lived and worked in the UK for a period as a non-resident, then you will have accrued pension rights. These may have been in an employer scheme, a private pension, or a stakeholder pension.
• If you are a UK citizen, do you live permanently overseas or intend to retire outside the UK?
• If you are not a UK citizen, do you live permanently overseas or intend to retire outside the UK?
If you can answer 'yes' to two of the questions and have a SIPP (Self-invested personal pension) then you should still look at switching sipp vs qrops your investment to a QROPS. If you have UK pension rights and intend to stay in the UK, then you do not have an option to invest in a QROPS, but should look at a SIPP.
Differences between a QROPS and SIPP
Once the differences between the two schemes are laid out, it's easy to see why a QROPS generally wins out over a SIPP if you have the option to take out a scheme.
SIPPs are limited to those available under UK pension rules but QROPS have a lot more flexibility in terms of investing in different markets, commodities and currencies.
SIPP benefits are paid net of tax, and QROPS are paid gross.
QROPS has no requirement for a scheme member to buy an annuity and no tax penalties arise from not buying an annuity. SIPP members have no tax charge if they buy an annuity without drawing down any benefits. But if benefits are drawn down and an annuity is bought before age 75, the tax charge is 35% of the fund amount and if benefits are drawn and no annuity is bought until after age 75, then the tax penalty is 82% of the fund.
Lifetime Allowance (LTA)
SIPPS are subject to LTA rules, a QROPS is not.
A SIPP is best suited to those living in the UK, a QROPS can only be held by someone living outside the UK. If you hold a QROPS, the scheme can be based in one country while you live in another.
Because in most cases an annuity dies with the holder, although a joint annuity can be bought with a reduced return that expires on the second death, a QROPS has no such restrictions. A QROPS can be left as part of the member's estate for the benefit of family and loved ones.
Currency exchange fluctuation
A Qualifying Recognised Overseas Pension Scheme can invest and payout in many different currencies, including Sterling, the US Dollar, and Euro. This allows hedging against currency exchange fluctuations that can diminish your pension spending power.
As an offshore investment with more flexible options, your retirement fund is not so much subject to economic policies and inflation in a single country.
Because your QROPS can live in one tax jurisdiction that allows a low tax on fund growth while you can live in another with low-income tax, a QROPS can give the best of both worlds. For instance, pension funds are taxed in Australia but benefits are tax-free, so you can have a QROPS outside of Australia paying low tax on fund growth and draw the benefits tax-free.
Switching to a QROPS
Providing you have not bought an annuity with your pension fund, transferring one or more UK pension pots to a QROPS is feasible. If you have an old QROPS product, you may even find upgrading to a newer product with a different provider is cost-effective.