QROPS or SIPP, SIPP or QROPS? How do you see your way past the acronyms to work
out which is the right one for you if you’re a US connected individual?
Changes in the last couple of years to UK pensions, such as removing the need to
purchase an annuity and the abolition of the 55% ‘death tax’, have meant QROPS may
have lost some of their advantages compared with a SIPP or other pensions. We’ve
investigated some of the key issues to give you a clearer picture.
Income and tax issues
QROPS are a legitimate pension solution for many British expats but your country of
residency and how the local tax laws may affect the benefits of the scheme must always
be taken into account. What may work well for an expat in Portugal may be a
completely different story for someone in the US.
If the QROPS is based in Malta, income can be paid gross and will be taxed both
federally and by the state (if applicable) in the US.
For a UK pension, the double taxation treaty between the UK and US clearly defines
how distributions can be taxed. The individual would apply for a NT (No Tax) tax code
and then gross income payments can be taxed federally and by the state (if applicable)
in the US.
Death Benefits
The changes made in recent years to the taxing of death benefits have certainly
narrowed the gap between the use of a QROPS and a SIPP.
In a QROPS, death benefits can be paid to any specified beneficiary free of tax.
With a UK based pension, pre-retirement benefits can now also be paid to any chosen
beneficiary, free of tax. Post retirement, benefits can be paid free of tax as long as the
individual is under the age of 75. After the age of 75, the benefits can be drawn down or
paid as a lump sum taxed at the beneficiary’s marginal rate, or as a lump sum to a trust
with a 45% tax charge.
Accessing your pension pot
Under QROPS legislation, only 30% of the fund can be taken as a lump sum from tax
from the age of 55. The remaining 70% must be used as income.
With a UK pension under the pension freedom rules, there are now no limits on the
amount of the fund you can access. 25% of the fund can be taken as a lump sum free
from UK tax after you reach 55. Any amount above 25% would be taxed as income.
Tax may be due in the country of residence under both a QROPS and a SIPP.
The risks involved
A transfer into a QROPS when the individual is a US resident can be considered taxable.
Malta, which is a commonly used QROPS jurisdiction, has signed up to the Foreign
Account Tax Compliance Act (FATCA) and this means the QROPS trustees are obliged to
report information about the scheme to the IRS. This can lead to tax charges for the
transfer itself and involve compliance checks of the underlying investment assets. The
investment assets must be structured in a way that they are IRS compliant so they are
not classed as a Passive Foreign Investment company (PFIC) which incurs 30%
withholding taxes.
In contrast, UK-based pensions utilise the double taxation treaty and are clearly defined
as qualifying from an IRS point of view. The tax treaty has been in operation for many
years so it is tried and tested. Another key point is that UK-based pensions are excluded
from FATCA reporting so there are no concerns about incurring withholding taxes due
to the compliance of the underlying assets. A SIPP is however viewed as a trust and so
the underlying portfolio needs to be compliant.
The Verdict?
So is the use of a QROPS a viable solution or do the risks outweigh the benefits?
Even with there not being as many advantages as previously, a QROPS can still be a
good solution for British expats but for those in the US, a thorough assessment should
always be made and the decision made on a case by case basis.
There is no denying that the changes to UK pension legislation have greatly improved
the situation in terms of death benefits and access to retirement funds for those
choosing a SIPP. There are also UK pensions which are designed specifically for Brits in
the US, which can prove very attractive.
The answer to which pension is more suitable will, as ever, depend upon your
individual circumstances but with the pensions landscape having altered so
considerably, it is vitally important to get FCA regulated, specialist cross border financial advice to help you to choose the right option.
At Cross Border Financial Planning, we have a wealth of experience in both QROPS and
SIPPs so do get in touch if you have any queries.