High Net Worth Individual (HNWI) is a term used in the financial services industry to designate persons whose investible assets (such as stocks and bonds) exceed a given amount. Typically, these individuals are defined as holding financial assets (excluding their primary residence) with a value greater than US$1 million.
Year on year growth has seen High Net Worth Individuals (HNWIs) decreased their investment allocation into real estate and property investments and increased the amount of money that is held in overseas investment in the past ten years, according to a wealth report on the region’s ultra-rich.
Despite real estate remaining the largest asset class for High Net Worth Individuals (HNWIs), the trend towards moving funds into overseas investments or ‘offshore’ is on the rise, according to the 2018 Wealth Report released by AFRAsia Bank and New World Wealth last week.
The report found that from 2007 to the end of 2017 HNWIs decreased their real estate allocation from 33% in 2007 to 30% in 2017. At the end of 2017, real estate was the largest asset class for HNWIs (30% of total HNWI assets), followed by 70% in equities, business interests, bonds, alternatives and cash.
Over 2016, 1.1 million people’s fortunes grew enough to see them enter the HNWI bracket. The rise in wealth has been put down to shares in both US and European markets performing especially well. The report also highlighted the fact that individuals who are already rich are getting richer more quickly than the wider population. This comes as no surprise considering that HNWIs have access to financial advice. In fact, during 2016 HNWIs earned returns of 24.3% on average in portfolios overseen by wealth managers.
Fund platforms fall into two distinct groups: fund wraps and fund supermarkets. Both are services that enable investors to buy investments simply online, usually at a discounted rate. In many cases the investments purchased can then be held on the Platform in a range of tax efficient wrappers.
Expat financial advice online and High Net Worth Individuals can now hold your assets in an online platform portfolio allowing you full access to see the performance of the funds. Funds within the portfolio can be managed on your behalf giving you more freedom to relax whilst gaining tax free capital growth on your investment portfolio.
The platform has an open architecture philosophy. Its aim is to offer access to the broadest possible range of investments, including collective investments (UCITS including OEICS, SICAVs etc), structured products, ETFs, Investment Trusts, cash deposits and to direct equity trading. The added Bonus is that the funds grow and your wealth increases, we can then mitigate your inheritance tax issues also.
Quite simply, a QROPS is a pension plan that; "Qualifies" with HM Revenue and Customs (HMRC) rules, is officially "Recognised" by HMRC, is "Overseas", i.e. outside of the UK and is set up in trust as a legal "Pension Scheme", hence the acronym.
A QROPS therefore, can accept a UK pension transfer just like any UK based scheme. The benefits of transferring your fund into a QROPS include increased tax efficiency, flexibility, total investment freedom and large growth opportunities to name just a few. They act as the trustee for the pension allowing the funds to be invested further to obtain growth. A wide variety of funds can be selected to suit the individual needs of the policy holder.
Following the new pension rules on the 09th March 2017, the UK government placed a 25% tax charge on pensions that are transferred to a QROP scheme if you are living outside EEA. Therefore, if you were to live in Dubai for instance, a QROP is not suitable for your pension transfer.
What are the Benefits of a QROP for High Net Worth Individuals?
Tax Free Amount
There are a number of countries that permit their resident nationals take 30% tax-free cash, as opposed to 25%, as it stands in the UK. Because HMRC stipulate that a QROPS must provide the same benefits to its members as those entitled to the nationals residing in its country, the QROPS jurisdiction and HMRC allow up to 30% to be drawn as a tax-free lump sum subject to certain requirements.
A QROPS scheme only needs to keep 70% of the original transfer pot as retirement income. This is an important statement. The 70% that must remain in the QROPS is based on the value of the UK scheme on the date of the transfer to the QROPS, not the current value.
This gives an incentive for one to transfer to a QROPS as long as possible before retirement, provided they already have built up a big enough pension fund in a UK scheme to realise the benefits of doing so.
A transfer to a QROPS is a benefit crystallisation event (BCE 8), and the funds will be subject to a lifetime allowance test at that time, regardless of whether you as a member have reached pension age or intend to take an immediate income following the transfer. But the lifetime allowance only has significance in the UK (pre-transfer), and taking retirement benefits from former UK pension funds held in an overseas pension scheme will not trigger a BCE.
This allows a client to use a QROPS to benefit from no maximum lifetime allowance.
Any growth in value of the QROPS above the value of the UK Lifetime Allowance (£1.25m 2014/2015) paid as a pension, will escape the 25% Lifetime Allowance excess tax charge.
This charge would otherwise apply to any pension paid from a UK registered pension scheme to persons who are UK resident or non-resident for less than five years where the value of the pension exceeds the Lifetime Allowance (£1.25m 2014/2015, £1m 2016 onwards).
Inheritance Tax Benefits
When you set up a QROPS, you nominate your beneficiaries which you are entitled to change at any time, so that means you can pass on your wealth to loved ones far easier, faster and less stressful for your family than with you can with a UK pension.
Another benefit to passing on your wealth through a QROPS is the fact that your family and loved ones will completely and legally avoid paying the Inheritance Tax which is levied on UK pension schemes. This can be up to 55% of your pension’s fund value.
Inheritance Tax is calculated on your entire, worldwide assets if you are domiciled British, even when you are resident overseas. If HMRC can establish Britain was the country you regarded as home at the time of your death, your UK pension would be subject to IHT.
If you have a UK pension, these funds will incur an IHT charge of up to 55% when they are left to your beneficiaries. IHT does not apply to QROPS, the money you have worked your entire life for can be passed onto your loved ones free from tax at source.
Do you hold a pension, bond, savings or looking for an investment structure that can have your hard earned capital working harder? Contact Expat Financial Advice Online and discuss how discretionary fund management can benefit yourself.