QROPS and Annuities – A Matter of Life and Death

 

Annuities are more than just a retirement investment – they are a matter of life and death

Once you have bought an annuity, that’s that – you cannot switch to a better paying product or a different provider.

Your annuity may have to fund your retirement for 20 years or more, so making an informed decision so far in advance while taking in to account inflation, recession and other economic factors is difficult.

A few miles can make an awful lot of difference to paying for your retirement – if you live in Dover; you have no choice about buying an annuity before your 75th birthday because if you don’t, you may face a massive tax penalty.

When you die, your annuity dies with you and your family and loved ones cannot benefit from your lifetime of saving.

How a QROPS benefits your family and loved ones

Now catch the ferry and 90 minutes later move in to your new home just a few miles away in Calais. After a while you will qualify as non-UK resident but you still retain your UK pension rights.

Instead of having a UK pension plan, you transfer your fund in to an offshore pension called a QROPS (Qualifying Recognised Offshore Pension Scheme) in a low-tax financial jurisdiction like Guernsey or the Isle of Man – although many more places are available to choose from.

Now, you have no obligation to buy an annuity when you retire and can continue to draw money to make your retirement more comfortable from your QROPS investments.

More importantly, when you die your pension fund carries on living to benefit your family and loved ones who can inherit the fund through your will and estate.

What is an annuity?

It’s an investment that pays an income for the rest of your life, no matter how long – or short – you live.

You buy the annuity from an insurance company with your pension fund and the scheme pays out based on an interest rate that generates the annuity payment from your cash fund.

Different types of annuity products are available, including a joint life annuity, but the payments are reduced in comparison with a single life product because the risk is doubled. You can elect how much income your partner will receive after you die.

For example, a 50% joint life annuity means that when you die, your partner will receive 50% of your pension until he or she dies. Then, the fund dies with your partner.

Insurance companies love annuities

The drawback of an annuity is that if you die soon after retirement, no one benefits from your pension cash except the insurance company providing the annuity that keeps it.

So, if you have a single life annuity based on a fund of £100,000 and you die two or three years after the purchase, all that cash just disappears as far as your family is concerned.

Beating the annuity trap

If you have UK pension rights and intend to live or retire permanently overseas, then talk to an independent financial advisor about a Qualifying Recognised Overseas Pension Scheme. The fact that you do not have to buy an annuity is one huge financial benefit to your family – and just one of many tax advantages and flexible investment options that come with the scheme.

For instance, you do not have to live in the same country as your QROPS is based, so you can park your QROPS in a place with a low pension fund tax environment and live wherever you wish or even move from country to country, as long as you stay outside of the UK.

Estate planning and your QROPS

Making a will and planning succession is a vital part of tax and financial planning, and even more so with a Qualifying Recognised Overseas Pension Scheme because of the substantial amounts of money generally in the funds.

Cross-border inheritance tax planning is a complicated sector, so make sure you take advice from an independent, regulated advisor to protect your interests and those of your family.

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