High net worth individuals, particularly key executives and directors of owner managed businesses, used to pay a significant portion of income into their pensions, significantly reducing their income tax exposure. Substantial amounts of pre-tax income could be contributed to registered pension schemes without charge each year. This ‘annual allowance’ peaked at £255,000 in 2010/2011 but has since been dramatically reduced. It now stands at £40,000 per year, and just £10,000 in certain cases.
In addition, the UK government introduced a £1.5 million ‘lifetime allowance’ in 2006, which was a limit on the amount of pension benefit that can be drawn from pension schemes – whether lump sums or retirement income – without triggering an extra tax charge. This increased each year to 2010, when it reached a level of £1.8 million, but has also since been reduced and now stands at £1 million.
As a result, many top earners (typically those earning £150,000 pa) will now receive a higher salary or bonus from their employer. Salary is taxed at 45% over the £150,000 threshold, on top of which there is national insurance at 2%. These high earners also lose their tax free personal allowance of £11,000 each year.
The erosion of tax benefits from registered pension schemes, together with their complex rules and investment restrictions, mean that a QNUPS should now be considered as an alternative, and potentially more effective, mechanism for retirement saving. High net worth individuals who have already built up £1 million or more in total pension savings are likely to find QNUPS of particular interest.
QNUPS are generally established and funded by individuals (known as Personal QNUPS), but can also be established by employers (known as Corporate QNUPS). The two most prominent jurisdictions for QNUPS provision are Malta and Guernsey.
The UK government introduced the QNUPS legislation in 2010 in order to extend the inheritance tax exemption that already applied to registered pension schemes to QNUPS. This simply means that the value of the pension pot on a member’s death should not be subject to IHT. Of course the overall tax treatment of the pension fund on death will depend on the individual circumstances of each case.
Contributions to personal QNUPS do not attract UK tax relief which means that they are funded by taxed income or accumulated wealth (capital). The size of total contributions to QNUPS should be proportionate to the level of retirement provision that is required in the case in question.
The pension fund should grow free of tax in the country of establishment and withholding taxes in the country where investments are located can, with care, generally be eliminated or mitigated.
The type of investments that can be held in a QNUPS depends on the local laws of the country in which it is established. Both Guernsey and Malta QNUPS are permitted to investment in all types of property, as well as in unlisted shares.
A Corporate QNUPS should generally be set up with a view to benefitting all or most of the employees of the company that is setting it up, but distributions can be apportioned and made in accordance with the suggestions of the board. That contribution to the QNUPS will not be deductible for corporation tax purposes when it is made; only when benefits are provided. However with UK corporation tax currently at 19% (and set to fall to 17%) the employer may be willing to accept this
The UK tax benefits of a QNUPS include:
- A tax-free lump sum of 25% is available on retirement (from 50 years old in Malta; 55 in Guernsey).
- Investment in residential property permitted.
- Gross roll up on fund growth
- IHT exemption applies on member’s death.
Employee benefit consultants and human resource departments should be utilising supplementary pension solutions for their senior and valued employees. Sovereign can offer pension trustee services for both corporate and individual QNUPS through our regulated trust subsidiaries based in Malta and Guernsey.
For further information, please contact Simon Denton on 020 7389 0555 or by email to sdenton@SovereignGroup.com