QROPS Professionals Concerned with Budget 2014's Assault on Expat Finances

Contributed by Jamie Waddell, 31 March, 2014

Whilst the pension reforms announced in last week's Budget were certainly headline-grabbing and heralded as a boon for UK pensioners, QROPS industry experts have announced fears that new legislation may prove detrimental to QROPS providers and expat savers alike.

Chancellor George Osborne revealed plans to lift restrictions on accessibility of defined contribution pension schemes, allowing members over 55 to take the full amount as a lump sum from 6th April 2015. 25 per cent of the full amount can be accessed tax free, with the remainder subject to taxation based on the member's marginal income for the tax year in which it's withdrawn. This greater flexibility has sparked concerns that QROPS will become a less popular scheme for expats.

Moreover, proposed plans to cut the UK's current 55 per cent death tax rate and impose restrictions on transfers from defined benefit pension schemes threaten to further reduce QROPS' appeal.

We quizzed several IFAs and QROPS specialists on their reaction to Budget 2014 and what they believe the future holds for expat finances.

Nigel Green, founder and CEO of deVere Group, deemed the Budget's pension changes an act of "style over substance", and vehemently denied that the new policies would adversely affect the QROPS industry.

"The scrapping of restrictions on pension access will be a policy that will have little real appeal to the vast majority of people.  This is because accessing a pension will be taxed at the individual's highest marginal rate of income tax – which for anyone with total UK income (including salary, rental and investment income) over £31,866 will be 40 per cent and 45 per cent on all earnings over £150,000.

"The average pension transfer we encounter is £320,000, which will lead to considerable tax charges if accessed all at once.

"We have found that QROPS enquiries have increased since the government's proposals were announced and this upsurge, it can be reasonably assumed, is being driven by those who might shortly not be able to take advantage of the many associated benefits of QROPS." 

James Cartwright, Senior Product Analyst at QROPS Review, agreed, adding that the impact of the pension changes would only be felt "at the lower end of the QROPS market".

In regards to the other proposed changes, he told us:

"As far as the reduction of the death tax rate is concerned, it's widely held that a considerable decrease would constitute too great a cost to the treasury resulting in its cancellation. There's a good chance that this is a proposal to garner popularity ahead of the 2015 election, and the PM has admitted this is being planned on a long-term scale".

More worrying for Mr Cartwright is the proposed restrictions on transfer of defined benefit schemes, which could see those who have worked in the public sector unable to transfer funds into a QROPS.

"This change could severely limit the choices of the UK pension member if they choose to retire overseas. Firstly, if one were to be retiring to somewhere such as Canada or Australia they will be assessed for tax from a UK defined pension scheme, whilst payments from a QROPS would be tax free. Whilst this clearly helps the Treasury, it's not so great for the long-term saver looking to retire abroad.

"Furthermore, if they're unable to transfer to a QROPS the income would be paid out in sterling. Fluctuating exchange rates would leave uncertainty as to their final income."

Mr Green, however, doubts that this ban will be put into practice.

"I believe it unlikely that the government will introduce a 'carte blanche' ban on transfers. Remember that many companies are eager to reduce their defined benefit liabilities and would actively encourage members to transfer out of their DB schemes if they were permitted."

It's this uncertainty over which legislation will and won't be introduced that has Paul Davies, director at QROPS advisory specialist Global QROPS, worried about the future of the industry.

"From the initial budget announcement it has not been clarified as to whether QROPS will be permitted to pay benefits in the same flexible manner that UK pensions will. There is also the question on how the lump sum benefits, paid form a UK pension, will be treated for tax for a non-resident member. It will be interesting to see if QROPS schemes, post 6th April 2015, will be allowed to pay benefits in the same flexible manner as UK defined contribution pensions".

Mr Davies' concerns are not unfounded, HMRC previously imposed a restriction on certain QROPS paying out the fund as a 100 per cent lump sum, as was the case in New Zealand two years ago.

Budget 2014 raised further alarm bells as George Osborne proposed a review of non UK residents' tax allowance.

"To ensure the UK personal allowance remains well targeted, the government intends to consult on whether and how the allowance could be restricted to UK residents and those living overseas who have strong economic connections in the UK".

This could mean that UK expats living outside of the EU would be deprived of their tax allowance (currently standing at £10,000 but to rise to £10,500 next tax year), a situation that Mr Cartwright sees as "potentially disastrous".

"If the restrictions on defined benefit schemes are introduced alongside the removal of the tax allowance, expats could find themselves in a situation in which not only would they be paying far more tax but would have no option to transfer their pension to limit their tax liability. This could be potentially disastrous for those with smaller pension pots".

If many of these proposals come to fruition the coming weeks and months could dramatically alter the landscape of expat finances. 

Tags: interest | budget | pensions | investment | Canada | New Zealand | Australia | legislation | public sector | tax |



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