QROPS is finally coming of age

QROPS is finally coming of age and Advisors are now clearly using QROPS as a vital wealth management tool. Whilst this is not true for the entire industry, as cases of poor advice and pension abuse are still being seen from both the advisory and product manufacturing communities’, best practice in relation to QROPS is definitely emerging.

As such and to evidence the benefits of QROPS as a valuable wealth management tool, Close showcases a number of real life case studies* which show how advisors have worked with Close and used QROPS as a key part of a client’s financial planning. In most cases QROPS has provided for the structuring and creation of income and succession planning in order to meet client’s financial aims.

Case Study 1

Scenario

Jennifer, a chartered accountant has moved to Dubai to take up a new position as Finance Director for a large hotel group. She is 37 years old and is married with two children aged 4 and 6. She wishes to work in Dubai for 3 to 5 years and then could either move to Asia with her new company or alternatively, back to the UK (she is not certain).

Financial objectives are as follows:

The terms of her current two UK pensions both state that on her death only 50% of the value of her final salary pension would go to her husband. She is also unhappy that should her husband pre decease her only a total of 20% would go to their children and furthermore that amount would be either subject to tax at 35% (if she died before the age of 75) or 70-82%(if she died after the age of 75). She would like:

• Greater investment flexibility and more influence over the investments selected
• Efficient estate/succession planning is important
• A tax efficient pension plan that is equally effective if she lives in Dubai, Asia or returns to the UK.
• She is also concerned about possible death duties / UK IHT in relation to her benefits.

The solution using a QROPS

• Her Financial Advisor has recommended a Close QROPS, which also qualifies as a QNUPS, as 100% of the clients remaining assets will on death be paid to chosen beneficiaries, or alternatively by letter of wishes the client can request that on her death the remaining assets be placed in a new trust structure for her husband and children. She is considering this option and finds the flexibility of a Close QROPS, which is a Guernsey Retirement Annuity Trust Scheme, very appealing.
• If she dies whilst outside of the UK and after the five year reporting period, there will not be a danger of UK taxation applying. The Close QROPS is also a QNUPS it therefore provides protection against possible UK IHT and as the plan is able to accept non tax relieved funds as additional contributions into the QNUPS element, it allows her to make further contributions to the QROPS whilst she is offshore.
• The Advisor has recommended using a Fund platform under the QROPS that is cost effective and provides access to a whole universe of overseas funds. The advisor has assessed the client’s investment profile and they have agreed which Funds will be purchased to create the desired portfolio.
• If the client returned to the UK at any stage she can keep her QROPS in place and she will only be taxed when she draws benefit (as if it was an onshore UK pension), and if she goes offshore again she will have her offshore QROPS in place into which she can transfer any further pension value she accumulated whilst back in UK and continue to make further contributions.

Case Study 2

Scenario

David is a mature gentleman of 67 years who for the past 15 years has lived outside of the UK. He is divorced but has re-married a younger Malaysian woman who is 32-years-old. David has created wealth of circa £1.8 million outside of his pension in addition to having three UK pensions totalling £380,000. He has 2 children from his first marriage.
Financial objectives are as follows:

• To look after his second wife following his death and protect her from any culturally forced heir ship arrangements which apply in Malaysia
• He has no need for any pension income as he is independently wealthy
• He has no plans for any children with his second wife
• To provide for his existing children in their later years
• To avoid unnecessary taxes and death duties (such as UK IHT) on both his retirement fund and other wealth he has accumulated

The solution using a QROPS

• To consolidate his three pensions into one Guernsey Retirement Annuity Trust Scheme (which is QROPS registered).
• Make an additional contribution of £400,000 from his other wealth into the Scheme as a contribution to a QNUPS (ie, apply non tax relieved funds to his Guernsey RAT as a top up)
• On his death he has requested the trustees to provide 10% of the fund value to pass to each child.
• In addition 10% of the plan value is to pass as a capital payment to his wife.
• The remainder of funds assets are to be placed in a trust for the maintenance of his wife during her lifetime.
• Following his wife’s death he has directed the trustees that the remaining trust assets will be split equally between his two children or their respective families
• The use of a Guernsey RAT that is a QROPS but which is also able to accept non tax relieved contributions as a QNUPS mitigates the effect of UK IHT on the wealth settled into it.

Case Study 3

Scenario

An unfortunate, but sadly common, scenario where Jeff is terminally ill aged just 58. He is still employed however he left the UK 6 years ago leaving behind 2 adult children and a substantial frozen UK defined benefit pension with a cash equivalent transfer value of £1 million. His wife has predeceased him. Under the rules of the existing DB scheme his offspring would only benefit from 19% of the value of his fund less 35% paid as a tax charge on the distribution as the transfer is not to his spouse.

Financial objectives are as follows:

• The client wishes to pass on his accumulated pension assets to his children on his death in the most efficient way and has no need for income, and indeed he has made the decision not to crystallise his pension fund post transfer.

The solution using a QROPS

By transferring his pension into a QROPS that is also a QNUPS on his death his children would receive the total sum of £1 million as a death benefit. Had the scheme remained in the UK the lump sum payment would have equated to £123,000 on death before any UK tax charges. Hence a saving of £876,500 and full wealth transfer to his children on death would be achieved.

Conclusion

The scenarios presented show that each and every client has very different pension and planning requirements. The structure of a QROPS and the interactivity between QROPS and QNUPS is very innovative and allows for financial planning to incorporate income generation and succession planning, making a real difference to people’s lives.
But the pro’s and con’s of utilising a QROPS need to be fully understood by advisors as using a QROPS should not be a forgone conclusion. Equally important is the selection of a competent and reputable QROPS provider whose activities won’t breach HMRC rules and undo well formed financial plans. Advisors should look to providers that publish their codes of conducts and have clear rules around what their scheme will and will not do, as they have a lot to lose both financially and in terms of reputation if they get it wrong. They should also look for credible QROPS jurisdictions that make a commitment to operate within the framework established by HMRC, like Guernsey.