QNUPS were created through The Inheritance Tax Regulations 2010, which came into force on 15 February 2010. Before A Day - 6 April 2006 - protection from UK Inheritance Tax applied to certain non-UK pension schemes. When the changes were made on A Day, this exemption was inadvertently omitted and, without this having been corrected, UK pension funds, once transferred to a QROPS, would have become liable to UK IHT charges.

The regulations also created QNUPS.

Being a Qualifying Non-UK Pension Scheme, a QNUPS must broadly satisfy the same conditions as that of a 'Recognised Overseas Pension Scheme'. Importantly there are no reporting requirements to Her Majesty's Revenue and Customs.

Advantages of QNUPS

Funding

• No limit on contributions
• No need to have any employment (relevant) income to make contributions
• Can be funded by contribution, transfer from an International Pension or QROPS*

Growth

• No capital gains tax
• No UK income tax on non-UK source income from investments
• No lifetime limits on fund size
• No investment restrictions, multiple currency options

Benefits

• UK IHT and local succession taxes may not be payable from the QNUPS fund upon death
• QNUPS should avoid local succession law, enabling the client to control who inherits
• Flexible income can be deferred until age 75
• If UK income tax is due, only 90% of the income is taxable
• Ability to take a lump sum of up to 30%
• There is no requirement to purchase an annuity
• No reporting requirements to HMRC

It is not possible to transfer a UK pension directly to a QNUPS - the only way to do this is by transferring to a QROPS, and then once non-UK tax resident for five tax years, arrange for an onward transfer to a QNUPS.

Who would consider a QNUPS?

• Expatriates saving for their retirement who may wish to return to the UK in the future
• High net worth UK residents or domiciled individuals who have already utilised their maximum income tax relievable pension contributions
• Anyone who, after 6 April 2010, will become restricted to basic rate income tax relief on UK pension contributions
• Individuals wishing to transfer from an International Pension Plan - IPP
• Individuals wishing to transfer from a QROPS*

Disadvantages of QNUPS

No tax relief on contributions. Employer contributions are not advisable.

Features

The regulations state that at least 70% of a member's relevant scheme funds must be used to provide the member with an income for life and the pension benefits are payable no earlier than age 55.

Taxation of the QNUPS

Income Tax Outside the scope of UK income tax, unless UK source income is received

Capital Gains Tax (CGT) No UK tax on chargeable gains made by the QNUPS

Inheritance Tax (IHT) UK Inheritance tax would not normally be charged

Taxation of benefits paid from the QNUPS

The possible benefits payable under a QNUPS include benefits on retirement (including a lump sum of 30% of the fund and an annuity/pension for life), benefits on incapacity and early retirement and death benefits.

If the member is non-UK resident, there will be no UK tax charge on any payments to them from the QNUPS. They may of course, be taxed in the jurisdiction in which they reside. A UK resident would pay tax on 90% of the pension income paid from the QNUPS.

Loans to members

If the member has not retired, a loan may be granted to them. It is vital that the loan is commercial in all senses and not just in terms of the interest rate which applies. The loan will be an investment by the Trustees and therefore all the usual due diligence on the loan and the member's ability to repay which a prudent Trustee would undertake before making an investment would be carried out.

Guernsey rules currently allow loans of up to 25% of the value of the fund.

Conclusion

QNUPS can be used by UK residents as a flexible mechanism for providing retirement benefits. They are particularly useful as "top-up" pensions if an individual has not made sufficient provision for their retirement via their registered pension.

It is important that the contributions made to a QNUPS are proportional, both to an individual's overall wealth and to what is necessary to provide them with appropriate retirement benefits, taking into account any other existing pension rights they have.

Due to the possible application of the unauthorised payment provisions, we do not recommend that an individual's employer contributes to their QNUPS.

Benefits from a QNUPS received in the UK will be subject to Income Tax, depending on the type of benefit received. In many cases, it is possible for a pension commencement lump sum to be taken from a QNUPS without any UK tax.

Expatriates can use a QNUPS as a tax advantageous home for their long term savings, creating a safe haven for their wealth now and in the future should they return to the UK.

Transferring from a QROPS to a QNUPS

* Finance Bill 2011

The Finance Bill included sections that, whilst targeted at disguised remuneration through the use of EFRBS and EBTs etc, created a potential Part 7A charge on a transfer from a QROPS to a QNUPS. The updated FAQs suggests that regulations will be published in the summer and will provide an exclusion from the charge for sums which derive from the UK tax-relieved fund of a relevant non-UK scheme or the relevant transfer fund created by a transfer to a QROPS. In the meantime transfers from a QROPS to a QNUPS, where any of the fund value can be attributed to an employer contribution, should be avoided.

A QNUPS will qualify as an overseas pension scheme (as will a QROPS) and therefore could potentially be used to receive funds from IPPs.