In the 2014 Budget delivered by Chancellor George Osborne last week, the UK Government said it plans to remove the requirement for retirees to purchase an income stream, whether that be an annuity or through phased drawdown.
Under the plans, which will come into force on 6 April 2015, someone reaching the age of 55 will be able to take their entire pension pot at once, if they wish, with 25% tax free and the rest taxed at the retiree's marginal rate (subject to the person's lifetime allowance).
Additionally, UK death taxes, currently at 55% and often cited as key reason to use a QROPS, are to be reduced, possibly even scrapped altogether.
Furthermore, the Government has proposed introducing restrictions on transferring from defined benefit pension schemes, with a suggestion these will only be permitted in exceptional circumstances. If this were the case, clients may be prevented from transferring into a QROPS when migrating abroad if, say, they had worked in the public sector.
While, many aspects of these changes are up for consultation, the fact retirees will no longer be forced to purchase an annuity and that death charges will, almost undoubtedly, be reduced, does appear to pose some headwinds for the QROPS industry, according to some.
Still attractive for large pension pots
Trustee firm Sovereign Group, which runs QROPS from Malta, Gibraltar, the Isle of Man and a QNUPS product from Guernsey, said these changes may impact the lower end of the QROPS market.
A spokesperson for the company said: “Increased access to defined contribution pots at age 55 may make smaller pension transfers less attractive. However, where substantial pension funds are held, QROPS is likely to remain a very attractive option. Full commutation is unlikely to be tax efficient for the more affluent client and many long term expats will wish to divorce their affairs from the UK completely, including the Lifetime Allowance which remains in place.
“Although UK death taxes on pensions are likely to be reduced from the current rate of 55%, it is unlikely that they will disappear altogether and QROPS can be used to mitigate this. A block on public sector pension transfers would be noticed but have limited impact.”
However, Paul Davies, director at QROPS advisory specialist Global QROPS, said, while the full impact won’t be known until the details are published, possibly in the Finance Bill on Thursday, the changes could be “huge for the QROPS market”.
“It will have a huge impact if QROPS are not permitted to offer the same kind of retirement benefits which are being afforded to the UK schemes,” said Davies.
“From April 2015, if someone is retiring aged 55, they will be able to take out, certainly from defined contribution schemes their benefits as a lump sum, albeit only 25% tax free, with the rest taxed. It was only two years ago that QROPS were told they couldn’t do that and New Zealand, for example, was curtailed from allowing that. So whether there is going to be a U-turn on whether QROPS will be able to match these benefits, remains to be seen.”
Another concern of Davies, is the potential restrictions being placed on defined benefit schemes which could mean those emigrating permanently to somewhere like Australia could be hit both by continued UK tax and currency market fluctuations. He said Global QROPS will be submitting its views on this as part of the Government’s consultation.
QROPS a by-product of annuity failings
Meanwhile, Paul Evans, chief executive of SIPP and QROPS provider Brooklands Pensions, said these changes show the Government will no longer bow to lobbying pressure from parts of the industry, particularly the pension industry which had managed to persuade it for so long annuities were required.
“The Government over the last few years has been telling the industry, OK we will keep the restrictions in place but you have to make your product better, you have got to develop it,” said Evans.
“The insurance companies haven’t done that and therefore the Government has said, there you go, let people have what they want, which is full access to their pension money.
“The fact they have ignored pension company lobbying is a big sign that one, they're not going to listen to lobbying and two, it highlights that in some ways QROPS have been a by-product of the pension industry not delivering what people want.”
This story was amended on 25/03/2014 to clarify the Government's changes around annuity or "income stream" purchase