QNUPS: Enhancing Retirement Benefits

Individuals are encouraged to take responsibility for their own retirement planning and make adequate funding provision for this. However, for high net worth and ultra-high net worth individuals, the reality is that the restrictions imposed on UK pensions via the ever reducing Lifetime Allowance and Annual Allowance limits may not provide a level of pension benefit that is both sufficient and proportionate to their current earnings.

A QNUPS can be a highly attractive supplementary pension vehicle when used as part of a wider retirement planning strategy.  It can be used to meet a funding shortfall and help achieve the level of required pension income, in a flexible investment environment and with substantial tax advantages.

A QNUPS is best defined as the set of UK rules that must be followed for an overseas pension to be exempt from UK inheritance tax. They were introduced in 2010 via the inheritance tax statutory instrument (SI 2010/0051) on Qualifying Non-UK Pension Schemes. ROPS (Recognised Overseas Pension Schemes) are also QNUPS, but ROPS are subject to much stricter reporting requirements because they involve transfers of UK registered pension schemes, and must meet certain HMRC conditions or risk being considered an unauthorised payment. QNUPS differ from ROPS in that they are designed to accept new money or new assets and cannot accept a transfer in from a UK registered pension scheme. Therefore, they enjoy greater freedom and flexibility.

As a non-UK pension scheme, there are no limits on the amount of contributions made into a QNUPS, and the annual allowance and lifetime allowance limits do not apply, even for UK residents. There is no UK tax relief available on the contributions. QNUPS may allow a wider range of investment options than their UK counterparts including cash, equities, private equity, bonds, commercial property, and residential buy to lets. There may be a requirement that the product is liquid enough to be sold to provide an income at retirement, or that the nature of the asset can generate and income stream when required. Pension benefits can be taken as from age 55, and at least 70 percent of the fund should be used to provide a pension income. When structured correctly, the underlying assets in a QNUPS may be invested and grow virtually free of UK taxes (except in the case of UK-source income).  Assets placed in a QNUPS are immediately exempt from UK inheritance tax, which can be very attractive to both UK residents and UK domiciled individuals.

The benefits that a QNUPS can provide are evident, attractive and tempting to say the least. However, this is a specialist product, complex in nature and not suitable for every individual who is ambitious about enhancing their retirement benefits. The primary purpose of establishing a QNUPS has to be to provide relevant retirement benefits that would not normally be achieved through the funding restrictions applicable to UK registered pension schemes.

Specialist professional advice is paramount. The status of the inheritance tax exemption can be challenged by HMRC if it were to determine that the QNUPS was not set up in the spirit of the legislation. This means, the possibility of asserting that QNUPS has been clearly used as a tax avoidance tool, rather than as part of a genuine retirement planning strategy. Although there is no penalty charge for this, this undesirable outcome is more likely to be prevented if the individual’s personal circumstances are carefully analysed by a professional and qualified adviser who can determine the suitability of a QNUPS.  The trustees of a QNUPS will normally perform various checks to assess the suitability of a QNUPS for the applicant and will seek to protect clients from this risk. They will rely on the professional advice received from a tax adviser, financial adviser and actuary and will favour an evidence based approach.

There are a number of QNUPS jurisdictions to choose from and a tax adviser and financial adviser can consider all options and provide valuable advice on this. An actuarial report is essential to produce financial calculations that consider the individual’s overall wealth, their existing pension provision and demonstrate their retirement funding shortfall. They then discount that back to determine the level of pension contribution necessary. This will form the basis of the advice received and will provide justification that the pension benefits paid into a QNUPS are consistent with their overall wealth and retirement income needs. This robust approach is most likely to withstand a HMRC challenge.

The enactment of the recent UK Finance Bill 2017 has aligned the UK tax treatment of UK and offshore pensions, and confirms that a 25 percent tax-free lump sum can be taken from a QNUPS at retirement age. No changes have been made to the tax law that allows QNUPS to be exempt from UK inheritance tax.

For the high net worth individual who has already maximised the permitted amounts into UK registered pensions, or has plans to do so over the coming years through the use of the UK annual allowance, a QNUPS may present an excellent opportunity.

Given the complexity of overseas pensions, HMRC guidance is not as clear cut for QNUPS as it is for UK pensions. This may cause concern for some financial advisers who may feel it is a high risk area outside of their expertise. Advising on a QNUPS also requires an understanding of the relevant international tax environment and any potential tax consequences, which is in itself a specialist area. Bearing in mind that a QNUPS may be a suitable option for a high number of high net worth individuals, advisers who are not experts in international pensions should be able to identify their clients’ needs and refer them to a specialist adviser.  Giving consideration to a QNUPS as part of a client’s retirement options is a must in the post RDR (Retail Distribution Review ) world where advisers need to demonstrate their independence and consider the best outcome for clients.

When structured properly, in the right jurisdiction, and with the correct level of professional advice, a QNUPS can provide a very tax efficient and legitimate solution for certain high net worth individuals looking to achieve flexibility in the structuring of their retirement plans and wishing to complement their existing pension arrangements.

Joanne Rodriguez
Senior Manager