We want QNUPS. Nicola Plant writes for Professional Adviser
Pension Planning Beyond Limits:
Qualifying Non-UK Pension Scheme (QNUPS)
QNUPS were created by the Inheritance Tax Regulations 2010, which came into force on 15 February 2010. However, it’s only since the introduction of annual and lifetime allowances on pension contributions, which effectively limit the amount individuals can contribute to their pensions tax-free, that QNUPS have become an attractive form of ‘top-up’ retirement savings plan.
Currently, the maximum amount payable into a UK personal pension scheme on which tax relief is available is £50,000 annually, or a lifetime allowance of £1.5m. These allowances will be cut further after April 2014 to £40,000 and £1.25m respectively. Whilst contributions to a UK scheme paid in excess of these allowances are unlimited, there is a tax charge on them, making additional contributions unattractive. Therefore, high net worth UK resident individuals who have already used their annual and lifetime allowances, but wish to save more for their retirement, might consider a QNUPS. QNUPS are also ideal retirement savings vehicles for expatriates planning for their retirement, who may wish to return to the UK in future
The annual and lifetime allowances do not apply to QNUPS. Therefore, subject to contributions being deemed appropriate to the person’s circumstances, there is no limit on the amount an individual can add to their QNUPS to fund their retirement. This is because there is no tax relief on the contributions going into a QNUPS.
Another advantage of the QNUPS is that contributions do not have to come from employment relevant income. Contributions must be proportional to the individual’s overall net worth (i.e. not more than 50%). However, this means that independently wealthy individuals, whose income isn’t necessarily derived as a direct result of employment, can also shelter funds for their retirement by using a QNUPS.
A wide class of assets can be held by a QNUPS. This includes cash, quoted and unquoted securities, private equity, commercial property and residential property, although not your main residence. It is important to note, however, that a transfer of UK property into a QNUPS would be a ‘deemed’ disposal for capital gains tax purposes, which may trigger a tax liability at current rates.
One of the main advantages of a QNUPS is that the value of the fund does not form part of an individual’s estate on death and so is not subject to UK inheritance tax. For example, say an individual identifies that, in addition to their UK pension, they will need to set aside an extra £1m to fund their desired lifestyle in retirement. If assets were simply held and invested in their own name then, on death, (at current rates) as much as £400,000 would be liable to inheritance tax. If, however, this sum had been invested through a QNUPS, the fund would be outside the estate for the purposes of calculating inheritance tax and the person’s family would receive the benefit of this. Therefore, by saving for their retirement through a QNUPS, wealthy individuals can provide for their own future, whilst protecting assets for the longer-term benefit of the family.
During the lifetime of the QNUPS any growth in the fund is free of capital gains tax and there would be no UK income tax on non-UK source income. As regards administration, a QNUPS does not require registration with HMRC. Also, because the transfer in is out of post-tax earnings, or from personal capital, there are no reporting requirements. Provided the QNUPS is administered in a recognised overseas jurisdiction, such as Guernsey, it will be considered a qualifying pension and classed as a Recognised Overseas Pension by HMRC.
When it comes to extracting funds from the QNUPS on retirement, currently individuals can receive an income from their QNUPS at any time between the ages of 55 and 75. At this point at least 70% of the pension fund must be used to provide a retirement income for life. However, up to 30% of the fund value of the QNUPS can be taken as a tax free lump sum and there is no requirement to purchase an annuity.
Another advantage of a QNUPS is that income is paid out gross. The accounting treatment will depend on where the member is resident, so if they are non-resident then UK income tax will not be payable. Even if they are UK resident, under current rules, any income would attract a foreign pension allowance of 10%. This means that only 90% of the income would be taxed.
Whilst it’s important any contributions made to a QNUPS are proportionate, taking into account both overall wealth and other existing pension rights, they are a highly flexible and tax efficient structure that can be used to supplement existing pension arrangements. Wealthy UK residents and expats alike can, therefore, continue to make sufficient provision for their retirement through a QNUPS, whilst protecting the fund for the long-term benefit of their family.