As a pension trustee and administrator, Boal & Co have been working with all types of pension clients for more than 20 years. Our clients cover the full spectrum, including everything from high net-worth individuals, large multinational companies to less affluent clients.
One of the most hotly discussed topics common among all our clients is that of retirement and how best a client can maximise their position at this time.
Experience over the years has taught us that clients are individuals, and each client’s requirements are specific to them. Careful planning, though, can lead them into a much stronger position when they do eventually decide to take benefits.
Of course, investment during the working life of an individual plays a significant role in the eventual retirement outcome. In this article, we will concentrate on the taxation of benefits payable and some of the potential options that can be used to maximise a client’s position.
Qualifying recognised overseas pension schemes (Qrops) have proved very popular with UK expatriates since their introduction in April 2006. The main jurisdictions active in the third country market are all regulated well-known offshore jurisdictions – Gibraltar, the Isle of Man and Malta.
The benefit regimes in each jurisdiction generally follow that of the UK prior to April 2015 – that is, benefits are paid as an income after age 55 (although a small number of Malta providers will allow flexi-access type benefits like the ones HM Revenue & Customs introduced in April 2015 for UK defined-contribution pension pots).
But where should advisers place their clients to maximise the benefits that will be paid later in life?
When considering the best jurisdiction to place a client for retirement purposes, a key consideration is that of where a member will reside at retirement.
This is not the single most important aspect of the decision, as clearly a client could change their mind at a later date, but having the knowledge of a client’s retirement plans early helps to plan for their eventual retirement, as this will dictate how pension income is ultimately taxed.
Difference between jurisdictions
Each of the three main Qrops jurisdictions has its own unique method of taxing pension income paid to non-resident pension scheme members.
Generally, the method of tax will depend on whether the country of domicile of the scheme has a double taxation agreement (DTA) with the member’s country of residence. A summary of the taxing methods of each jurisdiction is as follows:
• Gibraltar – it has a simple way of taxing pension income and applies a very modest rate of 2.5% to any income paid. Gibraltar does not have any DTAs, so tax is always paid at source.
• Isle of Man – it has a number of DTAs in place, so these should be considered first. If no DTA is in place between the Isle of Man and the member’s country of residence then pension income is currently taxable at 20%.
• Malta – similar to the Isle of Man, although Malta’s DTA network is more extensive. If a member doesn’t fall under a DTA, then the member is taxed at non-resident tax rates, which are as follows:
€701 to €3,100 = 20%
€3,101 to €7,800 = 30%
€7,801+ = 35%
The next step
Advisers need to take great care when using DTAs. Some advisers think clients will simply be taxed in their home country just because a DTA exists. This is not true; in many cases the DTA actually bestows the taxing rights to the country where the Qrops itself is domiciled, which means more tax is paid than would be paid if the Qrops was domiciled elsewhere.
In addition, where taxing rights are passed to the member’s country of residence, this is often not automatic and clients need to be aware they must take appropriate steps with the relevant authorities in order to bring the terms of the DTA into force. DTAs, therefore, need to be considered carefully in the context of retirement.