Widening the Advantage Gap: How Pension Changes Will Affect QROPS
There are many benefits that come with transferring your UK pension to QROPS, especially for UK expats. These benefits are known collectively in the industry as the “advantage gap.”
However, since the changes to UK pension schemes have been announced, QROPS practitioners have been concerned that this gap will close. The changes seem subtle, but their repercussions could be significant. One of the changes, for instance, allows free access to pension schemes, while another removes the scheme death charge. A further amendment allows for small pension funds to be drawn in lump sum form.
At first glance, these changes significantly reduce the advantage gap, meaning that a pension transfer to QROPS is no longer the obvious first choice for UK expats. Upon further scrutiny, however, it becomes apparent that they are not as beneficial as they appear. Further, on the 19th of December 2014, a regulation was passed that extended these new, more flexible guidelines to apply to QROPS.
As a result, the advantage gap has actually widened.
With the tax benefits of QROPS, UK expats can expect, as usual, to save up to 45% on tax. This becomes even more relevant in relation to being able to draw a pension fund as a lump sum. Being able to do so with lowered taxes means UK expats can save an immense amount.
While the scheme death charge appears to have been removed, the fine print says otherwise. Far from being expunged, it has simply been amended, still being in application in the UK for those over 75.
Small pension funds – that is, funds that fall below £30 000 – can now, under the new regulations, be drawn as a lump sum. This appears to affect QROPS, but it must be remembered that QROPS only applies to much larger pension schemes, thus rendering this amendment irrelevant to the advantage gap.
It seems, then, that despite the new regulations, the advantages of transferring a pension scheme to QROPS still remain. This is good news for QROPS practitioners, but also excellent news for UK expats who want to retire abroad.