What is a SIPP?
A Self-invested Personal Pension (SIPP) is a government approved personal pension plan that is distinctly different from a private pension.
I’m an expat, is a SIPP more useful than a QROPS?
SIPPs allow for a greater range of investments than personal pension plans, however for expats the benefits of QROPS generally outweigh those of SIPPs.
How does a SIPP work?
A SIPP offers more flexible avenues of investment than a standard pension, however many SIPP products are often managed fully by the provider. Another option favoured by providers is a hybrid scheme where some of the assets are held in a conventional insured fund, and the rest is self-invested by the policy holder. This is to ensure the providers costs are covered. The final option is a full access scheme where the holder is able to invest as they wish, as long as it is within HMRC’s allowable investment asset class.
How does a SIPP compare to a QROPS?
All SIPPs come with the normal HMRC restrictions on pension plans, you cannot draw down until you are 50 (or 55 if born after 6th April 1960) and there is a lifetime allowance threshold of £1.8million. There are potential tax liabilities if you go above this sum and on income from annuities.
QROPS can offer all of the investment benefits described above but with a lower tax threshold, no lifetime allowance threshold and (depending on jurisdiction) little or no tax on capital gains and income.
Upon maturity, a SIPP offers a one-off 25 percent lump sum payment that is tax free. QROPS offers 30 percent tax free. Once you reach 75 in the UK, you must either purchase an annuity or set up an ASP.
What is an ASP?
An ASP is an Alternatively Secured Pension; it is an alternative to purchasing an annuity. An ASP is a type of income drawdown, if you opt for one over an annuity you can continue to make investments with your pension and take an income from the pension fund beyond the age of 75. The maximum amount of the fund that can be taken as income is 90 percent, the minimum is 55 percent.
However, a QROPS still offers more flexibility. Despite allowing you to pass on your pot after death, with an ASP the amount could be reduced by up to 82 percent, with a QROPS the entire amount is available for your heirs.
Keep in mind a £50,000 annuity will only pay around £75 per week in income. There is no such restriction on QROPS- you are free to do as you wish. If your pension income exceeds certain limits then UK residents can become liable for income tax. Non-residents face no such tax cost, but have the benefit of being able to draw down their money as they wish (including the option of a weekly income).
How are the two affected by UK Inheritance Tax?
Inheritance issues play a large role in pension planning. UK schemes do not class pensions as an asset. As you will have been forced to purchase an annuity, you cannot pass on the benefits to your heirs.
Whilst some annuities do allow a limited amount of income to be passed on, the majority of the remaining money will go to the annuity provider and HMRC.
QROPS are an asset and can be passed on as such (subject to the inheritance tax laws where you are resident). They can be easily wrapped up in Trust to pass on to your heirs in a tax efficient and expedient manner. Another option that can help you avoid UK Inheritance Tax is the QNUPS.
What is a QNUPS?
A QNUPS is a Qualifying Non-UK Pension Scheme that is similar to a QROPS with a few differences. A QNUPS was created to iron out a crease that was found in the QROPS. In some cases, depending on different jurisdictions, a QROPS may face Inheritance Tax charges, a QNUPS will not.
With a QNUPS there is no maximum age for investing, you can continue to place money in it for as long as you wish. Also, it is not necessary to pay contributions from employment-sourced income. With a QNUPS you are free from a maximum contribution limit.
However, because QNUPS are a very new product, it is advised that you discuss your circumstances with an IFA to establish if it is the best option for you.
Who can I talk to if I need more help?
Finding the right pension scheme brings complex decisions that require proper planning and professional help. Speak to a specialist financial adviser for impartial information on planning your retirement.