Understanding QNUPS

October 14, 2022

Since HMRC introduced Qualifying Non-UK Pension Scheme (QNUPS) into the pensions lexicon in 2010, there has been much interest but little uptake of these as stand-alone pension products.

However with the Lifetime Allowance being frozen in 2020/21 until at least April 2026 along with the annual allowance of £40,000 as a maximum contribution to a registered pension scheme, perhaps it is worthwhile taking another look.

Initially, many saw these as Inheritance Tax (IHT) planning vehicles, however the primary purpose of a QNUPS must always be to provide retirement benefits.

The limitations on how these benefits can be taken from most QNUPS (in comparison with flexi access from UK schemes), along with the difficulty in showing that the contributions were genuine retirement planning, meant that in reality very few cases were actually written.

Unlike Qualifying Recognised Overseas Pension Schemes (QROPS), there is no notification to HMRC for a QNUPS. It is therefore important to ensure that any scheme used as a QNUPS meets all of the relevant legislative requirements. The requirements for a QNUPS were set out in Statutory Instrument No. 51 in 2010 (to be effective from 6^th April 2006) and no changes to these requirements have been made since.

A major concern around QNUPS, and where they are most likely to be attacked by HMRC, is if it can be shown that the contribution was not made for genuine retirement planning.

In an ideal scenario a client would discuss their pension shortfall with their adviser, and the adviser would obtain a calculation of benefits. In a perfect world this would be from an actuary or similar qualified individual and would detail how to meet that shortfall based on their risk profile and future expectations. Following this, the client could invest the recommended amount into a QNUPS and the plan would be to start taking an income on retirement. As long as this is documented fully, and the non-UK scheme meets the QNUPS regulations, then any payments should be outside the client’s estate for IHT purposes.

While much has been talked about of the advantages of a QNUPS, it is worthwhile looking at the potential consequences of a contribution being made and HMRC deciding that the scheme, or the contribution made, did not meet the QNUPS requirements to be exempt from IHT.

If HMRC decide that the scheme is not a QNUPS, then the contribution made could be deemed a payment to a discretionary trust, with the tax implications of such. In addition, as the person contributing was also able to benefit themselves, this will be deemed a Gift With Reservation of Benefit (GWROB) and consequently any IHT benefits will be nullified.

Consequently, it is imperative that if a QNUPS is being considered it is well documented that the investment was made for the purpose of retirement planning. A target benefit calculation should enable this to be shown. Secondly, the pension scheme should be set up to ensure that it meets the requirements of a QNUPS in terms of its Deed and Rules.

By using innovative Isle of Man legislation, together with the capabilities of their actuarial consultancy, Boal & Co can now offer a solution to both of these problems with the Trinity Pension Scheme.

Aimed at UK residents who are affected by the contribution limits on UK schemes, and expatriates where a local scheme is not suitable or available, Trinity is designed to meet all the requirements of HMRC’s QNUPS legislation whilst providing access to benefits in a flexible manner. No tax is deducted at source on any benefit payments to members (other than IOM residents), and there is no IOM tax on death.

Boal & Co’s Actuarial Department are able to provide calculations to assist with the advice on how much to contribute to the QNUPS in order to meet the client’s income requirements on retirement. This could be invaluable should there be a need in future to show that the contributions made were genuine pension contributions.

The constant changes around pensions, and in particular international pensions, certainly require good professional advice, as the consequence of doing things in the wrong way is an unexpected tax bill.

Example

James, a 45 year old UK tax resident, is contributing the maximum allowable into his existing UK pension plan. From these contributions, he expects to have a fund of £867,000 by the time he intends to retire at age 55.

James has calculated that, at the time of retirement, he will require a total income of £60,000 per year in today’s terms to maintain his lifestyle.

Assuming James’ pension fund keeps pace with inflation, his fund will provide him with an estimated income of £42,500* per year in today’s terms.

In order to top this up and target a total pension of £60,000 per year, James meets with his adviser to discuss how to do so. Having agreed their expectations of future inflation and likely investment return, they ask Boal & Co’s Actuarial Department to calculate the contribution(s) needed to meet the £60,000 per year on retirement. Our Actuaries calculate that an amount of £41,500 pa for ten years would be required to fund the additional £17,500 at retirement, using the assumptions provided by the adviser. **

James makes the contribution into Trinity (A Boal & Co QNUPS) and agrees to meet with his adviser each year to monitor the performance against the assumptions and make any adjustments required. The investment is immediately outside James’ estate for IHT purposes.