Explaining the QROPS five-year ruleExpats can be really confused by the QROPS Pension five-year rule for offshore pension schemes – mainly because it can last for up to six years.
To make sure you understand the five-year rule, two key facts have to be considered:
- The rule talks about tax years not calendar years
- The rule is imposed to make a QROPS run under the same rules as a UK pension for the first five tax years after it is established
So timing, tax and finance have a lot in common with comedy, because often to get the best results, it’s all in the timing.
There are many articles on the interent giving advice about QROPS, follow this link to read more about a QROPS Pension
The best way of understanding the five-year rule is by following an example:
The best way of understanding the five-year rule is by following an example:
Kieran is 50 and wants to retire and start receiving cash from his pension
when he is 60. He lives in the UK and wants to retire to Spain.
On February 15, 2010, Kieran moves to Spain and transfers £200,000 from
his UK pension fund in to an offshore pension scheme or QROPS (Short for
Qualifying Recognised Offshore Pension Scheme).
The scheme does not have to be in Spain as long as it is not in the UK,
so Kieran considers Guernsey or the Isle of Man. Both have tax friendly regimes
but the Isle of Man allows him to draw down up to 30% of his fund as a cash lump
sum while Guernsey only allows a 25% draw down.
To comply with the five-year rule, Kieran’s tax clock starts ticking on
April 6, 2010.
During the five years, the pension provider has to tell HM Revenue and
Customs about any cash withdrawals in case they breach the scheme rules and
leave Kieran with a tax bill of up to 55% of the money he takes from the scheme.
The clock keeps ticking until April 5, 2015. This is the end of
Kieran’s fifth tax year absence from the UK. From now on, the pension pro0vider
has no obligation to inform the UK tax authorities of any cash withdrawals from
the pension scheme, providing Kieran has not taken up residence again in the UK.
If Kieran had withdrawn any cash in the five–year period, he would have breached the QROPS rules and the money would have been considered an ‘unauthorised withdrawal’ by HMRC.
Because of tax rules, HMRC could have charged Kieran up to 40% tax on the withdrawal plus a 15% surcharge for breaking the regulations.
QROPS Advice
Some advisors suggest that at the end of the five-year period, because the pension provider has no obligation to tell HMRC about cash withdrawals, then it’s OK for Kieran to make an unauthorised cash withdrawal of more than 30% of the fund total.
This is not correct. The 30% limit only applies to the Isle of Man and the level is stuck at 25% everywhere else. Even when the five-year limit has passed, drawing extra cash is an unauthorised withdrawal and can still be penalised by HMRC.
In fact, advisors claim HMRC is monitoring how the QROPS scheme is working and will delist any one who breaks the rules from the database of 1,700 providers held in the UK.
This promise has already been kept once, when all UK pension providers were barred from transferring funds to any of their counterparts in Singapore.
With an understanding of the five-year rule and how it affects withdrawing cash from a pension, anyone planning to retire overseas has a timeline to plan their date for leaving the UK and starting a QROPS.
From April 6, 2010, the minimum age limit for drawing down on a QROPS fund is 55-years-old.
Another key point to bear in mind with the five-year rule is that when the clock ticks past the deadline, a QROPS pension holder does not have to invest in an annuity with the balance of their retirement fund.
This is important because the pension fund no longer dies with the holder but can be passed on through the deceased’s estate.
A big tax incentive here is that UK inheritance tax no longer applies as the deceased is non-resident, so the estate is subject to inheritance tax regulations in the country where the deceased lived.
QROPS, country of residence and inheritance tax are all linked so it makes sense to get good advice from a QROPS specialist and an expert estate planner to make sure the most tax effective financial planning can be undertaken for the pension holder and their family.
We would advise seeking the very best advice available. The global leaders in Qrops pension transfers is QROPS.net. Search for them on the web and contact them direct to find out more about how a transfer to a QROPS Pension can benefit your situation.
This is not correct. The 30% limit only applies to the Isle of Man and the level is stuck at 25% everywhere else. Even when the five-year limit has passed, drawing extra cash is an unauthorised withdrawal and can still be penalised by HMRC.
In fact, advisors claim HMRC is monitoring how the QROPS scheme is working and will delist any one who breaks the rules from the database of 1,700 providers held in the UK.
This promise has already been kept once, when all UK pension providers were barred from transferring funds to any of their counterparts in Singapore.
With an understanding of the five-year rule and how it affects withdrawing cash from a pension, anyone planning to retire overseas has a timeline to plan their date for leaving the UK and starting a QROPS.
From April 6, 2010, the minimum age limit for drawing down on a QROPS fund is 55-years-old.
Another key point to bear in mind with the five-year rule is that when the clock ticks past the deadline, a QROPS pension holder does not have to invest in an annuity with the balance of their retirement fund.
This is important because the pension fund no longer dies with the holder but can be passed on through the deceased’s estate.
A big tax incentive here is that UK inheritance tax no longer applies as the deceased is non-resident, so the estate is subject to inheritance tax regulations in the country where the deceased lived.
QROPS, country of residence and inheritance tax are all linked so it makes sense to get good advice from a QROPS specialist and an expert estate planner to make sure the most tax effective financial planning can be undertaken for the pension holder and their family.
We would advise seeking the very best advice available. The global leaders in Qrops pension transfers is QROPS.net. Search for them on the web and contact them direct to find out more about how a transfer to a QROPS Pension can benefit your situation.