Peter has finally managed to realise his dream to retire to Spain with his wife June. He has done well in his career and has a sizeable UK pension fund in his UK personal pension scheme.
Although he has capital to buy a home in Spain and some savings, he wants to be able to get the most out of his pension as he will be supporting June and himself through their retirement. As non Spanish nationals, they will not qualify for state pension benefits in Spain.
A Qualifying Recognised Overseas Pension Scheme (QROPS) may help Peter to get more out of his pension. A QROPS is an overseas pension scheme (recognised in local law as a pension) which meets certain scheme rules and reporting requirements laid down by the UK tax authority (HM Revenue and Customs) so that a transfer from a UK pension scheme to a QROPS will be an authorised payment in the same way as a transfer from a UK pension scheme to another UK pension scheme.
If the QROPS provider is based in Spain, or in a jurisdiction which has double taxation treaties with Spain, then Peter will not need to worry about paying tax twice on the income from the pension.
QROPS providers can link to a wide range of investment vehicles including offshore bonds. There is no tax payable on the funds (except withholding tax) in which the bond invests regardless of where Peter resides or the QROPS provider is located.
The QROPS provider would own the bond for the benefit of Peter. The bond is completely portable. Peter can benefit from investment diversity within the bond and benefit from the Scheme rules of the QROPS provider or HMRC rules for QROPS (generally, whichever is the more stringent. These rules tend to be more lenient than those for a UK pension. For example, the pension commencement lump sum may be higher than 25% depending on local and HMRC rules.
Although, leaving the UK, Peter will continue to remain UK domicile therefore would be liable to IHT on worldwide assets. Assets held in a QROPS are generally exempt from UK IHT and the use of QROPS may assist a client with proving non UK resident status.
As the bond is not a UK situated asset, there will be no UK income tax payable on encashments made by the QROPS provider for Peter.
How an offshore bond may help
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Portability of product and service
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Flexibility of investment choice
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Suitable investment vehicle for a QROPS
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Tax free growth on funds (except withholding tax) within the Bond.
Additional points to consider
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When planning your clients affairs, consideration should also be given to the finance regime and tax system in the jurisdiction of the QROPS provider and the client.
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UK HMRC can remove a QROPS approved status if they are not complying with their reporting requirements or they are operating outside the HMRC rules for qualification as a QROPS, so it is important to consider the choice of QROPS jurisdiction/provider carefully.
The information provided in this article is not intended to offer advice.
It is based on Skandia's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Skandia cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.