Guernsey: Pensions – The Offshore Option

Last Updated: 22 August 2011
Article by Martyn Russell

Most Read Contributor in Guernsey, September 2018

Originally published in Ardel Newsletter, August 2011.

Martyn Russell, Director at Ardel Trust in Guernsey, looks at how QNUPS can potentially provide the most tax efficient and flexible solution for a UK resident and/or domiciled individual.

Pensions never seem far from the headlines nowadays, whether it's relating to closures of corporate schemes, public sector strikes, changing the age of retirement or the amendments to tax treatment of existing arrangements by HMRC.

The pension arena is a highly specialist and complex field and Guernsey continues to be recognised as one of the leading jurisdictions for international pension provision. The island's reputable trust sector administers a range of offshore structures, both corporate and individual, from EFRBS to QROPS and the more recently introduced QNUPS.

Qualifying Non-UK Pension Schemes (QNUPS) were introduced in UK law in 2010. Originally, it was thought that these schemes would be beneficial in the main to UK expats – but what additional role can they play in the pension planning toolkit for those of us wishing to stay in the UK?

There are a number of scenarios where a QNUPS could potentially provide the most tax efficient and flexible solution for a UK resident and/or domiciled individual:

  • high earners who have already utilised their maximum income tax relievable pension contributions - which were reduced significantly in April of this year;
  • those who have received a sizeable sum on divorce and have no pension provision;
  • individuals not able to have a UK registered pension but who rely on a sizeable lump sum to support them in their retirement years.

For this last group the individual is unable to invest some or all of his lump sum into a UK registered pension scheme, since contributions must come from earned income. Therefore the traditional way he would provide for his retirement, has been to invest the lump sum in order to provide a regular income, and to be able to draw from the capital when required.

However the usual tax issues inevitably arise:

  • on the realisation of the capital growth on the investments, a liability to capital gains tax is triggered;
  • income tax is charged on income arising from the investments, whether or not the income is required;
  • on death the investment portfolio forms part of the individual's estate for inheritance tax.

A QNUPS can offer an alternative solution in this situation, furnishing an individual with the opportunity to create a legitimate pension planning vehicle. Benefits include:

  • growth on investments is free from capital gains tax;
  • income from non-UK source investments is only taxable when paid out – not as it arises;
  • with the appropriate planning and structuring the QNUPS can be kept outside the scope of inheritance tax;
  • contributions into a QNUPS are not restricted to earned income but can be from a wide spectrum of asset types, from bonds to investment trusts and alternative pension assets such as commercial and private real estate.

It is worth noting that contributions made into a QNUPS do not enjoy the same income tax relief as payments into other UK registered pension schemes. However in the case of the individual with a lump sum, the contribution is made from capital and therefore there is no material difference. There are additional benefits to a QNUPS also worthy of mention:

  • there is no requirement to purchase an insurance annuity at age 75. Therefore pension proceeds are not forfeited on death but can be fully distributed as part of an estate;
  • there is no limit to the contribution levels made into a QNUPS although they should be proportionate to the individual's circumstances so as not to be deemed to be a way of moving funds to avoid inheritance tax;
  • loans from the QNUPS can be requested from the trustees but would be on a secured, commercial basis and would be payable prior to any pension benefits being distributed.

Guernsey enjoys an enviable position within all areas of the fiduciary sector, and pension planning and administration is no exception. Local government continues to review legislation to ensure it maintains its competitive and commercial edge – recently increasing the value of the initial lump sum payable from 25% to 30% (subject to the rules of the individual pension scheme). This pragmatic approach coupled with a well-regulated stable environment in which providers operate, will only serve to strengthen the island's position in the future.

For more information about Guernsey's finance industry please visit www.guernseyfinance.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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