How a QROPS can assist clients mitigate the Lifetime Allowance (LTA) charge?

As we all know the UK lifetime allowance cap on pensions was reduced to £1 million and is planned to reduce further over the coming years. The Qualifying Recognised Overseas Pension Schemes (QROPS) is an option to consider for wealthier retirement savers as anyone who has a pension fund exceeding the cap will incur a lifetime allowance excess tax charge of 25% on income and 55% on lump sums.

As the investment markets improve and the economy booms, there is the risk for many retirement savers with funds in a UK based pension to see their fund soar through the LTA threshold and leave them open to the excess tax charge.

The history of the Lifetime Allowance

How do QROPS rules assist?

A benefit crystallisation event (BCE8) occurs at the time of transfer to a QROPS and the funds will be subject to a lifetime allowance test at that time. This is irrespective of whether the member has reached pension age or intends to take an immediate income. The benefits are only tested once and applicable in the UK (pre-transfer). At the time of taking benefits (post-transfer) there will be no further lifetime allowance test and no BCE. This allows a client to use a QROPS to benefit from no maximum lifetime allowance.

Unlike the UK, any growth in the pension fund in excess of the LTA (£1m 2016/2017) paid as a pension income will not be subject to the 25% Lifetime Allowance excess tax charge. This charge would otherwise apply to any pension paid from a UK registered pension scheme to persons who are UK resident or non-resident for less than five years where the value of the pension exceeds the Lifetime Allowance (£1m 2016/2017).

What if the value of my pensions are over 1 million before transferring into a QROP?

At the time of transfer, HMRC will be notified by your existing provider and valued. They will then compare this value against your lifetime allowance (£1 million for 2016/2017). If the transfer value exceeds your unused allowance, you will be liable to a tax charge. But if you have registered your UK pension savings for primary protection, enhanced protection, fixed protection 2012, fixed protection 2014 and 2016 or individual protection, you will be able to transfer the value of your UK pensions and protect the majority of your pension fund, if not all of those savings from a tax charge if they exceed the standard lifetime allowance that applies at the time the transfer takes place.

In circumstances where a client has exceeded any enhanced protection allowances, a QROPS cannot mitigate the tax charge liable at that point but it will mitigate all further charges from the time of crystallisation thus removing the tax liabilities from this point onwards.

What if you decide to retire back in the UK after transferring into a QROPS?

You can apply for an enhancement from the HMRC if your pension fund is near to or exceeds the lifetime allowance. The enhancement factor will ensure that the investment growth attained in the QROPS and any amount previously tested against the lifetime allowance on transfer to the QROPS, will not be subject to a lifetime allowance tax charge in the future. Additionally, clients can benefit from the QROPS switchback, this is possible depending on the jurisdiction that your QROPS is administered but Malta is a preferred jurisdiction due to its DTAs and flexibility.

Are you concerned by your clients pension Lifetime Allowance (LTA)? Interested in avoiding lifetime allowance charge?

Adviser Zone Ltd has the perfect cross border partners to understand what is best for your client’s current situation. Feel free to speak to us to see how we can assist you and your clients.