Guernsey: Moving Your Money

Last Updated: 20 September 2011
Article by Rex Cowley

Most Read Contributor in Guernsey, September 2018

Originally published in the International Adviser, QROPS Supplement, September 2011.

UK Sipps are frequently sold to expatriates, despite their disadvantages in terms of tax and succession, many of which can be avoided by transferring to a QROPS, says Rex Cowley, Head of Offshore Distribution Partners, Close Offshore Group

Sipp to QROPS transfer represents a significant opportunity for both advisers and their clients, particularly in terms of tax efficiency, succession planning and income production. So why is it that the practice of selling a UK Sipp to expatriates seems commonplace?

The following article gives a factual comparison of the issues and consequences of Sipp ownership for expatriates, all of which are mitigated by QROPS.

There are several advantages of holding and paying into a UK Sipp while UK non-resident. UK Sipps are well-known UK pension arrangements that UK expatriates are familiar with, and familiarity is one reason they are used. But this approach is fraught with folly, as it is not based on any financial planning principles or consideration for the wider implications.

In very limited circumstances, UK tax relief at source can be obtained for up to £3,600 ($5,866) for those who have no relevant UK earnings. Lower costs can be achieved as UK Sipp providers have better economies of scale than QROPS providers, but the differential in cost has reduced significantly over the past 12 months making this a moot point.

The administrator of a UK Sipp is FSA-regulated, which may be regarded as generating confidence at point of sale. But in most instances where the Sipp is sold outside of the borders of the UK, this protection does not apply. There is a lot of misinformation being spread about QROPS, which makes a Sipp the 'easy option' for clients who are unsure about what a QROPS can or cannot do.

Drawbacks of Sipps

However there are also several disadvantages of holding and paying into a UK Sipp while UK non-resident. A Sipp is still a UK registered pension – so while a Sipp may be a lower cost way of consolidating pension assets while living overseas – the tax dynamic and general advantages/disadvantages of holding a UK pension do not change at all, providing no additional benefit to clients, but creating the potential for a more complex tax structure for a client.

Having a UK-situated pension fund does not greatly assist other tax issues, such as losing your ordinary residence status or losing your domicile for IHT purposes. This, in turn, can bring a British expat's total estate into the UK IHT regime irrespective of how long they have been non-UK resident, with potentially disastrous financial consequences for beneficiaries.

Regardless of the FSA authorised status of a UK Sipp, there are no real protections under the FSA regulations as a UK non-resident Sipp holder. Particularly if your Sipp was sold by an overseas IFA. If a UK Sipp provider goes into liquidation, no protection is provided by the FSA; however, compensation is available through the Financial Services Compensation Scheme (FSCS).

The FSCS is independent to the FSA, and rights under the FSCS are only available to UK consumers, so protection under the FSCS will only apply to a Sipp purchased via an FSA authorised firm in the UK and in no other circumstances.

Therefore, better protection may exist within some QROPS. Higher tax-free cash is available through a QROPS: 30% as opposed to 25% in a Sipp. When living overseas, there is no tax relief on contributions other than in the limited circumstances mentioned above.

In addition, and dependent on arrangements prior to leaving the UK, further contributions to a Sipp can erode the lifetime allowances, reducing future tax breaks should the client return to the UK.

Beneficiary savings

With a UK Sipp, irrespective of residency, there will be a 55% special lump sum death benefit charge on death after taking drawdown, and potentially other unauthorised payment charges. These charges can be fully mitigated with a QROPS and represent obvious and significant savings to beneficiaries, and should form a vital component when undertaking tax-efficient succession planning.

The non-residence factor, which enhances the standard lifetime allowance, only applies pro-rata in relation to time spent offshore. It could have a watered down effect over the longer term if good investment performance is achieved within a Sipp post return to the UK, or if substantial payments into a UK Sipp are made while abroad.

With a UK Sipp, the nonresidence factor to enhance the lifetime allowance has to be formally claimed from HMRC using Form APSS 202. If this is not claimed, the allowance is not automatically afforded to the client.

Double Tax Agreements

If retirement takes place anywhere in the world where there is not a full Double Tax Agreement (DTA) with the UK (such as the Middle East or the Caribbean), the lack of such an arrangement means that Sipp drawdown income will be taxed at basic rate tax in the UK before it is received by the plan member. Hence, a position of double taxation may very well occur in certain instances, whereas a QROPS is typically paid gross.

In general, DTAs give no protection from taxes on excess relief, so as a UK non-resident with assets in a UK Sipp, the UK lifetime limit, special lump sum death benefit charge and unauthorised payment charges cannot usually be offset even through a DTA.

When transferring non-UK benefits into a UK Sipp while overseas, one can only obtain an enhancement against the lifetime allowance in respect of QROPS/ROPS transfers; all other overseas transfers do not count as they are not HMRC recognised.

Drawdown is fixed at UK rates (now 100% of GAD), and may be further curtailed if gender-based annuities disappear. With a QROPS/ROPS/QNUPS on properly segregated non-UK tax-relieved funds, or after being five years non-UK resident with a QROPS, the member can potentially draw down outside 100% of GAD and may in the future use non-EU annuity rates as a basis for a scheme annuity.

With a UK Sipp, less flexible beneficiary options exist than with a QROPS – beneficiaries can only be spouse or dependents under a Sipp, while the beneficiary classes are not restricted under a QROPS.

A UK Sipp can be subject to sharing or splitting orders on divorce, whereas QROPS are outside of the UK and generally not subject to the application of UK court orders, which in many cases can simplify settlements.

Value of QROPS

Much of this looks too good to be true, but let us not forget that QROPS legislation was specifically introduced so as not to prejudice those individuals who have left the UK (EU member state) and wish to take their pension with them.

Hence QROPS overcomes many of the issues associated with UK pension ownership, by non-UK residents, because it was specifically designed to do just that. It is also worthwhile noting that there is no disadvantage in holding a QROPS when returning to the UK, as the trustee effectively has to manage the QROPS, as a Sipp, on the member's return. So not considering a QROPS could turn out to be one of the most costly decisions an expat could make.

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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