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A SIPP or a QROPS?

Ever since QROPS have been available there has been a discussion, normally led by product providers, over whether a SIPP is better or worse for a client living overseas than a QROPS.

People tend to think of QROPS as stand-alone products, whereas in fact they are group pension schemes or personal pensions (SIPPS) that just happen to be domiciled outside the UK, and meet HMRCs regulations to receive transfers from UK pension schemes.


So, the question that should be asked is surely not, a SIPP or a QROPS, but whether to leave your pension in the UK, or move it outside the UK.


If a client is definitely returning to the UK, e.g. on a secondment for a fixed period of time, then there would seem to be little benefit in moving to an overseas pension.


The question therefore would be whether moving existing UK pensions into a UK personal pension would be good advice, which would depend on the same factors as if the advice was being given in the UK eg. Critical yield, charges and the ability to consolidate a number of schemes into one.


For the client who does not intend to move back to the UK there are real benefits to moving to a non UK pension.


One of the main drawbacks of a UK pension scheme is that, on death while in drawdown, the fund is subject to a charge of 55% on passing to beneficiaries. For a client who is planning to retire outside of the UK, this charge is not payable if death benefits are paid from a non UK pension scheme and the client has been non-resident for at least 5 tax years.


On retirement, all of the major QROPS jurisdictions allow for a Pension Commencement Lump Sum of up to 30% to be taken, as opposed to 25% from a UK SIPP. In addition, while the QROPS scheme has to provide an income for life from the pension fund, they are not restricted to using UK GAD limits and can, potentially, give a higher income level.


Pre-retirement, where a client is not drawing down from his pension fund, and assuming the same underlying funds and charges a UK scheme and a non UK scheme will grow at the same rate. However UK schemes are subject to a maximum fund size, known as the Lifetime Allowance. This is £1.5 million, and will reduce to £1.25 million from April 2014. Should a fund grow larger than this amount, a tax charge is levied on any additional funds over the lifetime allowance. This charge applies to any benefit crystalisation event, including transferring to a QROPS.


This lifetime allowance limit does not apply to non UK schemes, provided that the client has not been resident in the UK for 5 tax years prior to taking benefits. This means that, a fund which grows over this allowance before retirement will not suffer the additional tax charge within a QROPS.


It has been said that leaving it in a UK scheme is better as it is cheaper than a QROPS, however charges on non UK pensions, particularly the Lite versions, have reduced this apparent differential. Even so, many people are of the opinion that using a UK pension pre-retirement with a view to moving to a suitable overseas pension on retirement is the best thing to do. While there are merits to this, there are a number of potential reasons that perhaps make a transfer to an overseas pension a better choice.


1. Will it be possible to transfer overseas when the time comes? QROPS rules were introduced in 2006, changed in 2012 and may change again before retirement. We know a client can transfer overseas today, but cannot guarantee he will be able to when the need arises.


2. Lifetime Allowance Limits. If a scheme, through investment growth, reaches a level that is over the lifetime allowance any excess would be subject to a charge if held within a UK SIPP. This would not be the case if held in a QROPS.


3. Domicile. UK domiciled individuals pay Inheritance tax on worldwide assets. It is very difficult to lose UK domicile, and HMRC look at a number of factors, generally around the “intent” of the client to move back to the UK. Would a client, living outside the UK for a number of years, who decided, while overseas, to transfer into a UK pension be seen as showing “intent” to return to the UK and deemed domicile.


To simplify matters, assuming the advice has been given to transfer away from the client’s existing UK pension scheme, and into an individual plan in the client’s own name, the answer is surely that personal pension is the correct advice, however, the important question is which jurisdiction the personal pension, or SIPP is based.


Overall there is no one correct answer as to whether a UK personal pension or a non UK personal pension is preferable. The first thing to consider is whether a transfer from an existing UK scheme is good advice. If the answer is yes, then a decision needs to be made on whether a transfer to another UK scheme or a non UK scheme is more beneficial. For clients who do not intend to retire in the UK, a transfer to a QROPS has distinct advantages.


UK SIPP
QROPS
PCLS Maximum 25% 30%
Charge on lump sum death benefit post retirement 55% Zero Malta and Gibraltar
7.5% IoM
Lifetime Allowance restrictions Yes, £1.25 million from 2014 No
Minimum retirement age 55 55
Maximum income 120% GAD Based on local rules
UK Sourced income Yes No