Taking QROPS tax-free lump sums

Taking QROPS tax-free lump sumsOne of the big attractions of a Qualifying Recognised Overseas Pension Scheme (QROPS) for a retirement saver is the enhanced tax-free lump sums that are available in some financial centres.

British onshore pensions have a tax-free lump sum capped at 25% of the fund value, including tax relieved pension contributions and any fund growth.

The rules also state the retirement saver must be at least 55 years old to take the cash – unless exceptional circumstances apply, like the investor suffering from a terminal illness.

The five-year residence rule

QROPS follow slightly different rules that depend on several factors, including:

  • Whether the retirement saver has been non-resident for five complete tax years or more. The tax years are those in the UK, which run from April 6 in one year until April 5 in the following year.
  • The same age limit applies as in the UK, so QROPS benefits cannot be taken until the pension saver is aged 55, the current minimum retirement age
  • The ‘relevant transfer fund’, which is the amount of pension-relieved contributions transferred into the QROPS from a UK pension

The attraction of transferring to a QROPS is that the tax-free lump sum can be as much as 30% of the fund value.

One key rule is that 70% of the relevant transfer fund must be ring-fenced to provide the retirement saver with a pension income.

Calculating QROPS tax-free lump sums

This is how the calculations for QROPS tax-free lump sums work:

Say the value of a QROPS fund has grown to £165,000 from a single transfer of £100,000 of pension relieved contributions from a British onshore pension scheme. The saver was tax resident in Britain in the preceding five tax years.

To calculate the tax-free lump sum:

In the case of a QROPS, during the first five years from transfer, HMRC rules apply to the first £100,000 and then local rules apply to the additional growth of £65,000, so the total tax free sum is £41,250.

After the first five years of absence from the UK, the QROPS provider must protect that 70% of the original transfer, but if the country where the QROPS is based pays a 30% tax-free lump sum, then the calculation changes.

Taking our retirement saver’s £165,000 fund, the tax-free lump sum becomes 30% of £165,000, or £49,500.

The 70:30 rule applies to any money in the fund that has received pension contribution relief in the UK – but not to any contributions or growth that have not picked up the relief.

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