Impact of 25% Tax on QROPS Transfers

[Oxx]

I made a few calculations to see just how severe the impact of the new tax would be, making the following assumptions:

 

• Portfolio of £500,000
• Income rate of 3.7%
• Annual QROPS fee of £1,000

 

Under the old regime this would generate an annual income of £17,500.

 

Under the new regime, after 5 years the income will be £12,875, reflecting the reduced capital value of the pension pot.

 

In the first 5 years the income will be taxed.  If (a) you have no other taxable UK income the income will be reduced to £12,700, whilst (b) if you've used up your personal allowance and the £2,000 dividend tax allowance you'll receive only £10,100.

 

With a SIPP your income would be £17,400 and £14,800 respectively for (a) and (b).

 

In conclusion:

 

1. The new tax has removed any benefit of opening a new QROPS for expats living outside the EU.
    
2. If you have no other UK income, a SIPP for a pension pot of this size would result in a negligible reduction in income (£100/year), the lower SIPP charge offsetting the income tax payable.  However, the larger the pot and/or the higher your level of other UK income, the worse off you will be than if you opened your QROPS under the old regime.
    
3. There is a significant incentive to reduce UK taxable income.  So, for example, the pensioner should move all investments offshore, and sell any rental property and reinvest offshore.

[SpeakeasyThai]

Invest offshore?... where and how?

[Oxx]

28 minutes ago, SpeakeasyThai said:

Invest offshore?... where and how?

 

There are plenty of countries where you can open an offshore brokerage account and (if non-resident in the UK) avoid UK income tax, with Luxembourg, Singapore and Hong Kong probably being the safest options.  You need to check whether the broker fully covers all the markets on which you want to trade.  My broker in Singapore, for example, doesn't cover all of the London Stock Exchange - just the major markets.  Also, many brokers don't offer investments in funds - only in shares and ETFs.  Some brokers allow you to invest in individual bonds.  Others don't.  You need to do your research first.

 

Account opening can usually be done online, but you'll need to post off proof of identity and address before the count will be activated.  Alternatively, if you happen to be visiting the country, you can open the account in person, which is quicker and easier.  (No need to get notarised copies of one's passport, one just shows the original document.)  When I opened an account in Singapore I didn't need to get my proof of address document translated since they had Thai staff working for them.

 

Once the account is up and running, you wire money to the account and once it's received, you can start investing.

[KNJ]

25% tax free remains the same, and for QROS it is 30%

Where on earth can you get a broker that charges 0.2% for managing a fund,?....................I dream

 

Also 3.7% is not great

[Oxx]

28 minutes ago, KNJ said:

Also 3.7% is not great

 

However, it is prudent.  Research has suggested that historically a 4% withdrawal rate is unlikely to lead to your pension running out.  Subtract 0.3% to cover platform fees and you get 3.7%.

 

Coincidentally, the most conservative strategy for pension income is only to take the natural income, and this is achievable with this withdrawal rate.

[SpeakeasyThai]

1 hour ago, Oxx said:

 

There are plenty of countries where you can open an offshore brokerage account and (if non-resident in the UK) avoid UK income tax, with Luxembourg, Singapore and Hong Kong probably being the safest options.  You need to check whether the broker fully covers all the markets on which you want to trade.  My broker in Singapore, for example, doesn't cover all of the London Stock Exchange - just the major markets.  Also, many brokers don't offer investments in funds - only in shares and ETFs.  Some brokers allow you to invest in individual bonds.  Others don't.  You need to do your research first.

 

Account opening can usually be done online, but you'll need to post off proof of identity and address before the count will be activated.  Alternatively, if you happen to be visiting the country, you can open the account in person, which is quicker and easier.  (No need to get notarised copies of one's passport, one just shows the original document.)  When I opened an account in Singapore I didn't need to get my proof of address document translated since they had Thai staff working for them.

 

Once the account is up and running, you wire money to the account and once it's received, you can start investing.

Thank you. Yes i am non Uk resident and i am an investor for solid dividend paying shares such as glaxo, Shell etc. I am 53 and have a considerable amont invested in a UK platform. The budget is going to now eat into my income so i now need a new way forward. 

Btw what is a good broker to approach in Singapore or Hong Kong. If you could give me names i will investigate and also would welcome the opportunity to meet for a chat in person over a beer regarding this matter. Thank you so much for your advise.

[Oxx]

I'm not familiar with HK brokers.  In Singapore I've used Saxo (though their trading platform is overwhelming).  Very good service, with a personal relationship manager but they've hiked their prices too much for me to recommend them.  I've heard positive things about OCBC Securities and Phillip Securities.

 

If you have US stocks, one issue will be withholding tax on dividends.  With HK and Singapore brokers you'll probably find they withhold at 30%, rather than implementing withholding based upon your country of residence.

[SpeakeasyThai]

5 hours ago, Oxx said:

I'm not familiar with HK brokers.  In Singapore I've used Saxo (though their trading platform is overwhelming).  Very good service, with a personal relationship manager but they've hiked their prices too much for me to recommend them.  I've heard positive things about OCBC Securities and Phillip Securities.

 

If you have US stocks, one issue will be withholding tax on dividends.  With HK and Singapore brokers you'll probably find they withhold at 30%, rather than implementing withholding based upon your country of residence.

I would be holding UK blue chip shares and investment trusts (btw a lot of UK investment trusts are based in channel islands). Could i utlilize a Singapore trading account and hold these shares? (I don't want an advisor as i buy and sell on my own) so hopefully this would keep charges and fees low. 

[Oxx]

9 minutes ago, SpeakeasyThai said:

I would be holding UK blue chip shares and investment trusts (btw a lot of UK investment trusts are based in channel islands). Could i utlilize a Singapore trading account and hold these shares? (I don't want an advisor as i buy and sell on my own) so hopefully this would keep charges and fees low. 

 

As I've mentioned above, a Singapore account may not support all investment trusts listed on the LSE.

 

As I've mentioned to you in a private message, I believe Luxembourg is generally better (unless you want to invest in certain Asian markets).

[alanrchase]

Yes, I started the procedure to open a QROPS in early January. My financial advisor says it is now in limbo as to whether I will be able to avoid the 25% tax. Beginning to think the people who spend all their income enjoying themselves may have the right idea. The more you save to provide for the future the more the government shafts you.

Sent from my SM-A500F using Thaivisa Connect mobile app

[al007]

On 3/11/2017 at 9:22 AM, Oxx said:

In the first 5 years the income will be taxed.  If (a) you have no other taxable UK income the income will be reduced to £12,700, whilst (b) if you've used up your personal allowance and the £2,000 dividend tax allowance you'll receive only £10,100.

 

A word of warning, some of this information given by the original poster  is suspect, income in neither a Sipp nor Qrops , is taxed, however tax on dividends can not be reclaimed

 

I make that statement as a mere retired FCA, not to be antagonistic but as a well meant warning and saying double check

 

income referring to the UK is always taxed not just the first five years, unfortunately

 

The dividend exemption can not be offset against pension income

 

Another factor not mentioned is if the personal allowance is removed as has been commented on many times in the national press this would again make a very substantial difference to the income after tax, on the SIPP, but not on the QROPS

 

Further if a higher rate tax payer the QROPS option probably still remains a better option

 

Also Sipp income will be aggregated with other income, wheres Qrops income is not, and if it were coming from Gibraltar only suffer tax at 2.5%

 

An observation, there is a lot of ill informed advice out there try and find a reliable Chartered Accountant, that carries professional indemnity insurance

[Maximus33]

Alanchase, your adviser is correct to say don't do anything until a minimum of post 6th April 2017 and likely some time beyond that. It wont be clear how the new legislation affect different QROPS jurisdictions until then. It means QROPS will be less attractive to more people using 3rd party jurisdictions. Some individuals may still benefit but they are likely to be a small minority and it's very much a question of doing the maths and weighing up the risks and costs.

 

Good points made by al007. All UK pension income is taxed as earned income in the tax year it is drawn unless there is a double taxation agreement with the UK and your country of residence which includes private pensions (same applies to State Pensions).

[al007]

I am pretty well connected into the Gibraltar government and I believe flexible drawdown will become available in the very near future, like before the end of April, dependent however on your trustees and administrators ammending trust deeds or doing supplemental ones

 

On my own Gib QROPS I have just negotiated I get half end of may this year and the remainder next may, will all be treated as income and taxed at 2.5 %, by using actuarial evaluations and based on my ill health. 

 

My arrangement was approved by the Gib govt minister

 

Took six months of battling but eventually got there

 

Where there is a will there is a way

[al007]

25 minutes ago, Maximus33 said:

 

Good points made by al007. All UK pension income is taxed as earned income in the tax year it is drawn unless there is a double taxation agreement with the UK and your country of residence which includes private pensions (same applies to State Pensions).

My belief is regardless of whether or not there is a double taxation agreement in place, any pension paid in the UK, be it a private or state will be subject to deduction of tax at source, in the UK under the PAYE system, which could also include higher rate tax

 

The purpose of the double taxation agreement is to see in the country where you live, you get credit for the tax you have  already paid, I do not think double taxation agreements give the benefit of the lowest of the two tax rates

 

I have a very good understanding of tax and it is possible I am incorrect on my understanding but i do not think so