Auteurs

John Sweeney

Collaborateur senior

Kunal Vyas

Kunal Vyas

Associé

Read More
Auteurs

John Sweeney

Collaborateur senior

Kunal Vyas

Kunal Vyas

Associé

Read More

2 septembre 2022

International Pension Plans: the cliff-edge approaches

  • Briefing

Individuals with International Pension Plans need to consider their options before they reach "normal retirement age" (NRA) as defined by the rules applicable to that scheme. As explained below, NRA will vary from plan to plan, but it can be as young as age 50. Failure to plan can result in members receiving benefits at a time when they have no need for them and lead to potential tax inefficiency. Here we consider what action can be taken to avoid this.

What are they?

The term "International Pension Plan" (IPP) does not appear anywhere in UK tax legislation. Rather, it is a broad term used to refer to all sorts of overseas pension schemes. In this article, we focus on a specific type of IPP; being schemes that were established prior to 6 April 2006 (referred to as "A-Day") by employers to provide benefits for non-UK domiciled employees working in the UK. The significance of A-Day is that it is the date from which the UK pensions landscape changed fundamentally with the introduction of the rules relating to UK registered pension schemes (UK RPS).

Clients will often have both pre- and post-A Day IPPs, although the former are almost always more sizable since they were not subject to the limits that are now imposed on UK RPS and overseas pension schemes which have benefited from UK tax relief (known as "relevant non-UK schemes" (RNUKS)). Post-A Day IPPs are almost always RNUKS. (Sadly, the world of pensions is full of acronyms).

What is the issue?

IPPs were typically drafted to provide individuals with a 100% pension or lump sum upon reaching NRA. NRA will vary from plan to plan, but it can be as young as age 50 (considerably lower than in UK RPS where payments can typically be deferred until age 75). Significantly, there is often little to no flexibility in how and when these benefits are to be paid.    

This can present problems, particularly for individuals who have reached or who are approaching NRA, since the entirety of any pension and/or lump sum received by a UK resident will be subject to income tax at the individual's personal marginal rate of tax. Not only can this be inefficient, but in some circumstances, individuals can be effectively forced into receiving benefits at a time when they remain economically active and simply do not need them.

What can be done?

If tax efficiency is an individual's only objective, they might consider relocating and extracting a 100% lump sum when they are non-UK resident. Since the funds in IPPs almost always consist of contributions referable to the individual's employment in the UK, these payments remain within the scope of UK tax. However, if the individual is resident in a jurisdiction with which the UK has a Double Tax Treaty, that treaty will typically tax benefits received from the IPP in the jurisdiction of receipt, where the rate of tax may be lower than in the UK or, potentially, nil. Accordingly, depending on where an individual relocates to, it may be that they can receive the entirety of any retirement benefits completely tax-free.  

We can assist clients in deciding which jurisdiction they might wish to relocate to and liaise with local advisors to confirm the tax treatment which will apply to benefits received. We can also advise on UK anti-avoidance rules, including the "temporary non-residence" rule, which can give rise to tax charges for individuals who become non-UK resident to drawdown from their IPP(s) only to become UK resident again afterwards.

Of course, for many individuals, relocation is not an option, or they simply do not want to leave the UK. For these individuals, there may be benefits associated with transferring the assets in their IPP(s) to a Qualifying Non-UK Pension Scheme (QNUPS) and/or a Qualifying Registered Overseas Pension Scheme (QROPS). These schemes typically offer a deferral for the payment of benefits to age 75, and if the individual dies before reaching 75 death benefits will ordinarily pass to their beneficiaries tax-free.  

QNUPS and QROPS typically offer much greater flexibility, enabling clients to access benefits in much the same way as individuals access benefits from UK RPS and greater investment flexibility. This often contrasts favourably with the position where assets remain in an IPP.

As the largest private wealth team in Europe, Taylor Wessing regularly provides advice on IPPs and other remuneration structures, acting for both scheme trustees and their members. We are therefore well placed to assist clients in deciding how they wish to deal with IPP(s), which will include considering how benefits will be taxed if the funds remain where they are, whether a transfer(s) to a QNUPS/QROPS might be appropriate and what the UK tax consequences will be for the client on the subsequent receipt of any benefits. The key thing is to ensure that individuals with IPPs and scheme trustees obtain this advice in good time. 

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