What Happens To My QROPS at 75?
If you are approaching 75 and considering a pension transfer, or have already transferred to a QROPS or international SIPP and wondering what happens to your investment, we hope this helps.
Your death is major consideration when transferring a pension. If you intend to take income then your tax circumstances usually take priority, however, if leaving funds to beneficiaries is as or more important, other factors to be considered.
As a cautionary note, QROPS have been hugely oversold in recent years so when choosing a QROPS it helps if:
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you have or may breach the LTA (lifetime allowance - currently £1,073,100 in 2022/25) and want to avoid additional taxation
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you want the scheme pay out tax-free when you die (subject to how long you have been a UK non-resident, although your beneficiaries may still be taxed where resident)
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you remember offshore bonds are redundant in a pension structure, so look out for lock-in periods and commission-paying products
What Happens to a QROPS When You Die?
If you have a QROPS and approaching 75 you’ll be required to crystallise your entire fund. This is usually done when you take income or part or all of your PCLS (aka tax-free lump sum), but under QROPS rules the funds must be crystallised. You then need to decide if and how much of your PCLS you take (you may also be required to take an annual income), a decision made more difficult by trustees applying different rules.
As a popular QROPS location, Malta trustees will crystallise your funds but then offer different options. Some allow one opportunity to access your PCLS, so if your whole entitlement of 25% or 30% is not taken, this option then ceases and any further payments will be deemed taxable as income. However, other trustees allow up to one year to phase PCLS payments, reducing the urgency to and allowing more time to decide.
The 'once only’ option of taking your PCLS needs thinking through. Taking maximum PCLS to avoid paying tax on remaining funds removes it from the pension structure, and so reinvesting it elsewhere could incur capital gains or other taxes, and could also be taxed where you live.
On the other hand, taking maximum entitlement and sitting on too much cash is ill-advised, more so with current double-digit inflation eroding the value of cash. So what happens to your pension after death plays a huge part in the type of scheme you should transfer to, or indeed from.
Some countries have favourable succession tax rates and others don't. Although QROPS offer tax benefits, the scheme must close on death of the member and the funds distributed, which might not be ideal for tax purposes. In the UK for example, beneficiaries of a QROPS where the member died after 75 (or had not completed 5 years overseas) are usually taxed at their marginal rate, so substantial payments could be taxed heavily.
Minimising Death Taxes on a QROPS
For a surviving spouse, trustees may permit 'in-specie' transfers to another QROPS and allow income payments to continue (if they are age 55). If a beneficiary is not of pension age, QROPS rules still apply and access isn't permitted until 55 (not ideal for everyone or funds left to grandchildren). Trustees may also arrange funds to be settled in trust on terms they deem to be appropriate, but this is on a case-by-case basis and trustees are not bound by the member's wishes.
Another option is to consider moving your QROPS to an international SIPP (self-invested personal pension). This may have tax implications, but if your beneficiaries want control over how they access the pension after your death or leave the funds to grandchildren, a SIPP may be more appropriate.
On death after 75, international SIPPs can remain invested allowing beneficiaries the option of taking a large one-off payment (which could be heavily taxed), or receive income payments to potentially avoid tax at the highest marginal rate. This is particularly relevant for lower incomes or beneficiaries approaching retirement that can wait until their income reduces or ceases. Leaving funds invested can also create an ongoing family trust where untouched funds are left in situ for future generations.
This makes arranging the expression of wishes with your pension scheme essential to avoid unwanted issues, but can provide an excellent way of funding university for grandchildren or getting them on the property ladder much earlier than otherwise possible.