Home Economy Taking QROPS tax-free lump sums

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.

Saeed Maleki
Saeed Maleki
As the former co-founder of "Yazd Zamaneh" publication (زمانه یزد), Maleki is one of the most experienced reporter working for Pars Herald. Saeed started Zamaneh in cooperation with two local publications on 2007. Two years later he closed his news corporation due to post-election protests in which he was accused of agitating people to demonstrate against Iranian government. On the same year he joined Pars Herald Group as the Economy writer. He is currently studying in Yazd's Payam Nour University perusing his bachelor degree. City: Yazd Phone Number: +989127906398 Email: Saeed {at} ParsHerald.com Name in Persian: سعید ملکی

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