Guernsey QROPS

Setting Up A Guernsey QROPS - Your Questions Answered

Guernsey regulators have lost no time in introducing the necessary legislation for practitioners to offer Guernsey QROPS to the world wide expatriate community.

QROPS of course stands for Qualifying Recognised Overseas Pension Schemes and for such a scheme to be labelled QROPS; it has to be registered with HM Revenue and Customs. If the tax man doesn’t recognise it, then it’s not a QROPS.

ExpatMoneyChannel talks to Rex Cowley, Head of International Marketing (top right) with Close Asset Management here in Guernsey, to find out how QROPS works as a wrapper for overseas pension schemes and why having HM Revenue and Customs recognition is a must.

Hannah Beecham: Rex, let’s start with a summing up as to why an expatriate should get excited about a subject as seemingly dry as a Guernsey Pension Wrapper?

Rex Cowley: I think the key advantages are pretty fundamental. They allow expatriates to access a package of benefits which they currently cannot access via their UK scheme. Some of these benefits are very important with regards to long term financial Some of the advantages have evolved around tax efficiency, the ability to create income that specifically meets the expatriates requirements, and the ability for succession planning and the advantages in terms of providing financial benefit for dependants, be that of a dependant spouse or dependant beneficiaries.

Hannah Beecham: I’m wondering whether there are any limitations in terms of maximum amounts allowed to be taken as a lump sum and what happens to the pot in the event of death of the main beneficiary?

Rex Cowley: There aren’t any minimums and maximums in terms of contributions, so one good thing about QROPS is you can put money into it as you like. However, when it does come to pension age, which is typically 55, then the maximum lump sum you can take out tax free is 25%. So in that way it mirrors what you see in the UK. Certain schemes may allow up to 30%, however, there could be a tax charge on that additional 5%, so people have to be very conscious of that point. So, the lump sum benefit is the same in effect as what they would get from the UK.

Hannah Beecham: And you could be any where in the world and take out your lump sum of 25% tax free?

Rex Cowley; Yes. You can be any where in the world, take out your 25%, whether it’s tax free will typically depend on the jurisdiction in which you live. In Guernsey the lump sum will not be taxed, and the UK will not see it as an unauthorised payment. So no tax in the UK, no tax in Guernsey, but there could be potential tax in your local jurisdiction.

Hannah Beecham: Are there any other tax benefits for expatriates?

Rex Cowley: There are a number of tax benefits around QROPS. The first one is, as you pointed out, is that there’s no income tax on benefit payments in Guernsey for the member. So if you are living out in Spain or Australia you’re not going to be taxed by Guernsey on the benefit payment. The other thing is the income and investment gains within the portfolio are rolled up free of tax. So that there’s no income tax or CGT on the actual portfolio itself and they are also inheritance tax free. So if you have a QROPS, you will not pay UK IHT. If you retain your UK pension there’s a potential that you will pay inheritance tax depending on the structure of the pension in the UK. And that could be as high as 82%. So Inheritance Tax is one to really, really think about. The other advantage of QROPS is to do with domicile. A lot of expatriates are looking to shake off their UK domicile, so that they’re not captured by inheritance tax on death and by moving your pension from the UK into a QROPS, helps to sever those links. Also, when it comes to taking benefits; there is a number of ways in which you can take benefits. Through drawdown or through a range of different type of annuity structures. Each of those might be taxed differently in the jurisdiction in which you live, one being more favourable than another. So you have choice in the way in which you take benefit which could be more tax advantageous.

Hannah Beecham: Okay, so that’s covered the tax elements. What can a QROPS invest in?

Rex Cowley: QROPS don’t have real limitations in terms of investment content, which allows clients and their advisors to structure a portfolio which is efficient and in line with their own investment objectors. Hence true multi asset portfolios can be created which meet the risk and return criteria for clients and help achieve the long term pension objective or retirement objective a customer might have. Saying that, most product providers will imply certain restrictions. These restrictions will stop investments in high risk assets, also stop investment in geared and leveraged assets or potentially real assets. Things like, fine wine and cars, etc. And that’s because those assets typically don’t fit well with a pension solution. And ultimately in Guernsey the pension has a trusted responsibility attached to it. So product providers will be looking to ensure that the investment vehicles are managed in a sensible way to meet the object of the client.

Hannah Beecham: Is there any person or situation where a QROPS would not be the right vehicle?

Rex Cowley: QROPS isn’t for everybody. There are two reasons when you can’t have a QROPS. One, if you already have an annuity. An annuity is a single investment decision and once it’s made, it’s made. You can’t undo the annuity. So if you have an annuity you can’t move that to a QROP. The other instance where expatriates really need to think long and hard about a QROPS is where they’re in a defined benefits scheme in the UK and they’re looking to move that defined benefit scheme into a QROP. At the point of transfer benefits will be lost from the defined benefit schemes. Benefits such as potential indexation on your pension, which means it goes up in line with inflation or a set percentage year on year, could be lost. A widows pension could be quite beneficial and that could be lost. And indeed the promise or the defined benefit which typically is a percentage of final salary based on number of years worked, will be substituted for investment returns from a portfolio in equities and bonds for example. So you’ll be taking on investment risk and giving up the guarantee. In those circumstances expatriates need to get very good advice to compare the QROP and what they potentially are giving up.

Hannah Beecham: I see. That explains it very well. And another difference I’m interested in, what is the difference between a Guernsey based QROP and say, and Isle of Man based QROP?

Rex Cowley: All different jurisdictions have slightly different legislation and hence the QROP offerings may differ from jurisdiction to jurisdiction. Principles under QROPS are pretty much the same. But, for example, in Guernsey all income from a QROP is paid gross. So no deduction of tax. In the Isle of Man there is tax deducted. So as an expatriate, if you have a QROP in the Isle of Man you’ll have a 20% tax deduction, if you have a QROP in Guernsey it’s free of any tax. So, looking at the tax status of the QROP in the jurisdiction where it is set up is a very important point.

Hannah Beecham: What does this cost an expatriate to set up and manage and run a QROP?

Rex Cowley: It varies from provider to provider. At Close we have a product which is accessible from £300 to set it up, with a £300 annual cost, together with the underlying cost of the investment management solution that you select, which is very competitive. But that price varies. You can pay anything from £300 to about £5000 for pretty much the same service. So it’s important to shop around.