UK Pension Legislation Lump Sum Allowance

Lump Sum Payments

QROPS

Under normal UK pension legislation, you are entitled to a 25% lump sum at the age of 55. However, if you live abroad or intend to move abroad and live their for more than 5 years, you can access more of your pension via a QROPS pension transfer.

For QROPS pension transfers outside the UK: if that jurisdiction has a double taxation treaty with the UK, then local rules are referred to once the pension has been abroad for 5 years.

New Zealand QROPS have the greatest degree of flexibility when it comes to drawing benefits. There has been a great deal written about tax avoidance and applying ‘the spirit of the law’ and generally speaking, HMRC want to make sure that any pension transfers provide an income for life.

New Zealand has a double taxation treaty with the UK and you may take 100% at as a lump sum upfront, once you have been abroad for 5 years. You do not need to live in this jurisdiction to take advantage. You can live in any country abroad and use the NZ QROPS.

However, considering the ‘spirit of the law’ and the new anti-fraud QROPS unit which has come into force, you should really consider whether taking a 100% lump sum is in your best interests. Really, you should only be cashing in your pension if you have enough funds to provide you with a pension or you have extenuating circumstances such as a family member or yourself has a terminall illness. There would also be high charges on cashing in 100% of your pension upfront and you would lose any future interest on your pension.

For most clients, a transfer to an Isle of Man or Guernsey QROPS would be suitable and you can access 30% as a lump sum upfront. In fact, the new 50c rule in the Isle of Man allows 30% upfront + 100% of any increase in the value of your pension after transfer, which would suit those who fall into the higher income tax bracket.

Pension transfer examples:

1) John is 59 years old and has a UK pension fund worth £80,000. He has a property portfolio providing an adequate level of rental income. The property portfolio is underperforming as house prices have fallen recently and he doesn’t want to sell his property, but needs cash now. As he left the UK before 2006, he transfers his pension to a New Zealand QROPS and cashes in the entire fund as a lump sum. He then uses this tax-free fund (after fees) to purchase another property or holds the monies as emergency cash.

2) Andrew is 45. He left the UK in 2000 and has no intention of returning. The new 50c Isle of Man QROPS rule only stipulates that the member use 70% of his pension pot to provide a pension. Andrew has a £200,000 pot of which only £140,000 has to be used to provide a pension income.

Andrew has an initial pot of £200,000 that he invests in low risk funds which grow at 5% per year for 20 years, giving a £530,000 pension pot. But, only £140,000 needs to be used as a pension, meaning that the member has £390,000 which he can take as a lump sum to purchase properties when he retires. Leaving £140,000 to pay him a pension income.

(3) The same Andrew decides to take his 30% lump sum upfront, leaving £140,000 in the pension pot. This grows at 5% per year for 20 years. He will have a £371,462 pot of which £231,462 he can cash in to buy a property and £140,000 he can use as a pension income.

What happens if you return to the UK?

If John returns to live in the UK immediately after taking his 100% lump sum from the New Zealand QROPS, he is scot-free. There are no tax implications whatsoever in the UK or in Spain.

If Andrew returns to live in the UK when he is 52 and takes benefits from his QROPS when he is 55, he may take up to 25% of the fund that he transferred as a lump sum (£50,000) and all of the investment growth (£81,420). So even as a UK resident James is able to receive a lump sum of up to £131,420 which under current UK law is free from tax. The rest of the pension would be taxable.

For further information about how to maximise the value of your UK pension fund and get the best QROPS schemes available, please email qrops@credendaassociates.com

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