What happens to my QROPS aged 75?
If you are approaching 75 and considering a pension transfer, or already have a QROPS or international SIPP and are wondering if you are in the correct arrangement, you may find this of use.
What happens to your assets on death can be a major factor when considering a pension transfer. If you intend to take income yourself then your own tax circumstances usually take priority. however, if leaving funds to beneficiaries is as important, other factors than just where you and they live need to be considered.
Firstly, QROPS have been oversold in recent years so some useful points to remember when choosing a QROPS include:
it is likely you will, or have already breached the LTA (lifetime allowance - currently £1,073,100 in 2022/23) and want to avoid additional taxation
you want the scheme pay out free of tax in the event of your death (subject to how long you have been a UK non-resident, although your beneficiaries may still be taxed where resident)
an offshore bond is redundant in a pension structure, so look out for lock-in periods and commission-paying products
What happens to a QROPS when you die?
If you have a QROPS and are approaching 75, you’ll soon be required to crystallise your entire fund. This usually occurs when you opt to take income or part, or all of your PCLS (aka tax-free lump sum), but QROPS rules remove this option and funds must be crystallised at 75. You then need to decide if and how much of your PCLS to take (you may also be required to take an income), a decision complicated further by rules various trustees applying different rules.
Taking Malta as an example (being a popular QROPS destination) and once funds are crystallised, some QROPS trustees allow only one opportunity to access your PCLS, and if your whole entitlement of 25% or 30% is not taken this window then closes and any further payments will be deemed taxable as income. Whereas other trustees allow up to one year to phase PCLS payments, reducing the urgency to take a decision and offering more time to consider your options.
The ‘one-shot only’ approach to taking your PCLS should be thought through. Taking maximum PCLS to avoid paying tax on the remaining entitlement removes it from the pension ‘wrapper’, so reinvesting it elsewhere could then incur capital gains or other taxes.
On the flip side, taking maximum entitlement and sitting on too much cash is ill-advised, more so with current inflation rates effectively eroding the value of cash by 8-9% pa. Either way, considering what happens to your pension after death plays a huge part in the type of scheme you should transfer to, or indeed, from.
Some countries have more favourable succession tax rates than others. While QROPS offer tax benefits, on death the scheme closes and the funds distributed, and this might not be ideal tax wise. In the UK, beneficiaries of a QROPS where the member died after 75 (or had not completed 5 years overseas) are generally taxed at their marginal rate of income, so substantial payment could be very heavily taxed.
Minimising death taxes on a QROPS
For surviving spouses, trustees may permit an 'in-specie' transfer to another QROPS and allow income payments to continue (if they are age 55). If a beneficiary is not of pension age, QROPS rules again apply and access is not permitted until 55 (not ideal for everyone or for funds left to grandchildren).
Trustees may also also arrange the funds to be settled in a trust on terms they deem to be appropriate. This is on a case-by-case basis and it should be noted trustees are not bound by the member's wishes.
Another option is to consider moving your QROPS to an international SIPP (self-invested personal pension). This may have tax implications, but if your beneficiaries want more control over how they draw on the pension after your death, or indeed would like to leave the funds to grandchildren, a SIPP may be more appropriate.
On death after 75, international SIPPs can remain invested leaving beneficiaries the choice of taking a large one-off payment (which could be heavily taxed), or receive income payments to potentially avoid taxation at their highest rate. This is especially relevant for those on lower incomes or beneficiaries approaching retirement that can wait until their income reduces, reducing they tax pay with it. Leaving funds invested can also create an ongoing family trust where untaken funds are left in place for future generations.
This makes arranging the expression of wishes with the scheme essential to avoid unwanted complications, but can provide an excellent way of funding university or getting on the property ladder much earlier than otherwise possible.
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Using a QROPS in the correct circumstances can offer huge benefits but it is not always the best option. Many people find themselves paying high fees for QROPS when a much cheaper SIPP would have provided the same benefits. If you would like guidance on your best options or would like to discuss your circumstances with an expat advisor, get in touch and we'll get back to you shortly.