Will My Tax Free Cash Increase By Transferring My Final Salary Pension To A QROPS?
Posted by Simon Harvey on 30/10/09 13:44
One element that is always of significant interest is the lump sum or tax free cash entitlement that a QROPS could provide. This is of particular interest for migrating members of a UK final salary scheme.
There are two common methods for providing tax free cash from a UK final salary scheme.
The first method of tax free cash calculation is, typically, a reduction of the promised pension, using a commutation factor, to provide a lump sum. This commutation factor varies from scheme to scheme, although is usually in the region of 15:1. ie every £1 of the promised pension given up provides £15 of tax free cash lump sum.
The second method, is usually a final salary pension scheme will provide tax free cash on top of a pension. This entitlement is commonly worked out by multiplying the fraction 3/80ths with each year of the member’s service and their final remuneration.
It is highly unlikely that a QROPS would use anything like these calculations for tax free cash as it is unlikely that they would be final salary schemes. Realistically, a migrant using QROPS would be looking at around 25% of their transferred funds (certainly within the 5 year QROPS reporting period) as a lump sum. Specialist QROPS advice would be required as this could be more or less then what is available from their existing UK scheme.