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Using overseas pensions to invest large sums of cash

If you have a client who is planning a business exit strategy, tax-efficiently investing the proceeds of the sale can be challenging. In fact, the same can be said for any high net worth (HNW) client receiving a large sum of cash, whether it’s from the sale of an asset or a windfall.

An occasionally overlooked solution is an overseas pension. Specifically, pensions that adhere to HMRC’s Qualifying Non-UK-Pension Scheme (QNUPS) rules which were introduced in 2010. You see, QNUPS provide substantial investment opportunities for British nationals whether they live in one of several countries or in the UK.

The rules surrounding QNUPS are complex, but we’ve outlined the main benefits and limitations below. If you have a colleague or client this may interest, pleases don’t hesitate to forward our blog post.

First, the basics of QNUPS

Like usual UK pensions, a QNUPS must be set up for the purpose of retirement. Qualifying schemes are also treated in a similar way when making withdraws, as;

  • Income can be taken from age 55
  • They offer a 25% Pension Commencement Lump Sum
  • The remaining 75% can provide regular income via Drawdown

An important consideration is that, unlike UK pensions, when paying into a QNUPS, contributions don’t attract tax relief. The level of funding must also be proportionate to the individual’s wealth and provide income proportional to their lifestyle.

The tax efficiencies

The big plus of QNUPS are the two main tax advantages:

  1. They are exempt from Inheritance Tax (IHT). This is especially relevant for business owners planning their exit because if they’d had the business for more than two years, during ownership it would be free of up to 100% IHT thanks to Business Relief. As soon as the business is sold for cash, that exemption is immediately lost. By introducing those funds into a QNUPS the cash is immediately outside of the individual’s estate and would again be exempt from IHT.
  2. They are also exempt from Capital Gains Tax (CGT). If an exiting business owner would like to invest in other businesses, they would not qualify for Entrepreneur’s Relief (unless they were an employee of the business). This means they could be liable for CGT. As QNUPS are exempt from CGT, there would be no tax liability if the shares were owned by the pension.

Uncapped Allowances

QNUPS are not subject to the Lifetime Allowance that UK registered schemes are. Currently, the UK limit is £1.055 million, which can be surprisingly easy to exceed with years of contributions and investment growth. As a QNUPS is not limited by this figure they can be used to boost retirement income whilst avoiding severe tax penalties.

Whilst you are only able to pay a maximum of up to £40,000 a year into a UK pension, again, a QNUPS is not limited by this. Clients can maximise thier permitted Annual Allowance, which may, in reality, be less than £40,000, then begin funding a QNUPS.

Wide investment opportunities

A QNUPS typically offers usual UK pension investment options, such as collective investments, bonds, equities, gilts and cash. Like a Self-invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS), some also offer the ability to invest in commercial property. But this is where things get a little more interesting. Certain QNUPS, depending on the scheme rules and local jurisdiction where it’s based, let you invest in;

  • Residential property
  • Art collections
  • Classic cars
  • Fine wines

This opens a wide range of assets to diversify a client’s portfolio with alternative investments, although we should mention there can be higher risk when investing in a single asset class.

Internationally mobile

A QNUPS can also benefit individuals who frequently travel, and live and work in different countries for extended periods of time. Instead of creating a new pension with every move and funding it locally, QNUPS serve as a fully international pension that can be contributed to and accessed wherever your client lives.

Helping your clients

The rules are rather complex and do require a professional financial planner’s input, but we have a great deal of experience in this area. If you have colleague or clients who would like to discuss tax-efficiently investing the proceeds of a business sale or a large sum, The Sovereign team are here to help –  01454 416 653 or hello@sovereign-ifa.co.uk

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