Overview of Indian QROPS Schemes

QROPS (Qualified Recognized Overseas Pension Scheme) schemes in India are pension schemes offered to the returning NRIs, who are looking to transfer their UK pension to India. Indian QROPS schemes are pension schemes specifically designed for returning NRI’s who have worked in the UK and have acumulated UK pension rights, and who are now seeking to receive their pension in India. Her Majesty’s Revenue and Customs (HMRC) publishes a notification list of recognized QROPS schemes in India, under its ROPS rules.

The recognized Indian QROPs schemes are essentially Retirement Plans (also known as Pension Plans) offered by leading Life Insurers. Currently, there are 14 Retirement Plans from four different providers which are recognized as valid QROPS schemes in India for returning NRIs from the UK.

The Indian Retirement Planning scenario is more dominated by Government backed schemes like Employee Provided Fund (EPF), Employee Pension Scheme (EPS) and National Pension Scheme (NPS). The EPF and EPS schemes are Defined Benefit Plans, formulated for the employed category and the contributions are made either by employee/employer or both according to the norms stipulated by the Indian Government. The NPS scheme is a Defined Contribution Plan, open for all Indian citizens and NRIs and the returns are linked to the market performance. This scheme has its own limitations for NRIs as there are many restrictions for withdrawal. Thus Indian QROPS are a very specialised pension fund.

The Retirement Plans, popularly known as Pension Plans in India is mainly subscribed by those who are looking to supplement their retirement corpus, with their own personal contribution. For Indian residents, or UK citizens looking to transfer their pension to Indian QROPS, HMRC has recognized 14 Plans offered by four leading Life Insurers in India.

It is important to understand and get the right interpretation of what “Pension Plans” or” Indian QROPS Schemes” mean and how they work, in the Indian context.

Pension Plans are essentially retirement plans, with a distinct accumulation phase and distribution phase. The retirement plans available in the Indian market are either only accumulation plans or annuity plans or combined plans of accumulation and annuity. However, as mandated by Insurance Regulatory and Development Authority(IRDA), the highest authority for Insurance Regulation in India, it is compulsory to buy an annuity plan from the vesting benefits/maturity value of an accumulation plan. An annuity plan may be bought by any person with a lump sum to invest and requires regular payments till the end of life.

Pension Plans (For Accumulation)

In India, the accumulation plans are popularly known as Pension Plans/Pension Policies, as the maturity benefits of those are to be used only to derive a pension or regular payments after retirement. The accumulation plans are Defined Contribution Plans wherein the purchaser’s regular contribution and frequency are fixed at the time of purchase. Under accumulation plans, there are two types:

Participating Pension Plans – These plans are similar to traditional insurance plans in which the company offers a bonus as a percentage of the sum assured of the policy. The bonus declared every year is dependent on the performance of the insurance company in the previous year. The bonus gets accumulated till the end of policy term and summed up with the Sum Assured of the policy. The participating plans have very low-risk exposure and hence, the returns may be low.

Non-Participating Pension Plans – These plans declare their bonus amount to the purchaser at the time of purchase and the insurance companies are bound to pay the promised amount, irrespective of their performance. Non-participating plans can be market-linked plans, where the contribution is invested in recognized funds of the insurance companies. The policyholder usually gets the higher of either the fund value or the sum assured including bonus. These plans have a range of funds varying from aggressive to conservative risk profiles and the policyholder gets the option to choose the funds to contribute regularly. The returns of these plans vary depending on the funds chosen by the purchaser.

After the end of policy term/minimum investment period, the policy vests/matures and the accumulated corpus has to be utilized to buy an annuity. However, if the policyholder wishes to draw a lump sum, a sum equivalent to 1/3rd of the accumulated corpus will be paid and the rest has to be compulsorily utilized to buy an annuity.

Annuity Plans (For Income Distribution)

Annuity Plans are specifically designed to protect the policyholder against the risk of outliving his own resources.

Annuity Plans make regular guaranteed payments to the annuitant at a pre-agreed frequency of either annual, bi-annual, quarterly or monthly.  It is important to know the exact value of the annuity receivable before signing off as this cannot be modified later. With the purchase of an annuity, the purchaser loses the access to the capital. The annuitant’s exposure to re-investment risk is reduced as the rate of return remains constant throughout the agreed terms. Annuities don’t have death benefits but the derived payments from it or the invested corpus can be passed on to the nominee depending on the option given at purchase time. They also have a very low rate of return.

Types of Annuity:

Based on the time of payment disbursal:

  • Immediate annuity – In this, the purchaser starts receiving the payments immediately on purchase of an annuity. The annuity payments can be for a certain period or until the end of life of the annuitant or the spouse, as opted for.
  • Deferred annuity – In this, a person can buy an annuity but defer taking the payments for the time period agreed. The annuity is purchased with a lump sum and invested till the annuitant wishes to accept payments from it. It is important to understand that the deferred annuity is different from the accumulation period or premium payments.

Based on agreed term of payments:

  • Annuity Certain – In this, the annuity is paid to the annuitant to a certain number of years. The annuitant can choose the number of years and if the annuitant dies within the chosen period, the annuity will be paid to the beneficiary and the beneficiary does not receive any lump sum/death benefit.
  • Guaranteed Period Annuity – In this, the annuity will be paid for a guaranteed period of 5 years, 10 years etc. and a lower annuity will be paid until the end of life of the annuitant.

Based on the number of Annuitants:

  • Life Annuity – In this, the annuity will be paid for perpetuity i.e. end of life of the annuitant only.
  • Joint Life Annuity – In this, the annuity will be paid to the end of life of the last survivor of the annuitant and the spouse. There is an option that after the death of one of the annuitant, the surviving annuitant receives lesser payments.

The annuity products offered by the insurance companies may be a combination of the categories mentioned above. For example, an annuity may be an Immediate, Joint Life Annuity with Guarantee Period of 10 years.

Pension Transfer from the UK to QROPS schemes in India

Only fourteen of the available Pension Plans and Annuity Plans put together, are recognized by HMRC for transferring UK Pension to India. These fourteen are a mix of both traditional & market-linked and participating & non-participating pension plans and annuity plans.

Participating Traditional  QROPS Pension Plans Non-Participating Traditional QROPS Pension Plans Non-Participating Market-Linked QROPS Pension Plans Annuity Plans for QROPS
HDFC Life Personal Pension Plus HDFC Life Guaranteed Pension Plan – Traditional Exide Life Golden Years Retirement Plan Exide Life New Immediate Annuity with Return of Purchase Price
HDFC Life Assured Pension Plan HDFC Life New Immediate Annuity Plan
HDFC Life Click 2 Retire ICICI Pru Immediate Annuity
HDFC Life Pension Super Plus Max Life Guaranteed Life Time Income Plan
HDFC Life Single Premium Pension Super
ICICI Pru Easy Retirement
ICICI Pru Easy Retirement SP
Max Life Forever Young Pension Plan

 

How to choose the right pension plan among QROPS Schemes in India?

For most of the QROPS Schemes in India, the entry age is 55 years. According to IRDA rules, all the market-linked pension plans must have a minimum investment term of 10 years. This is to ensure adequate contribution and sufficient growth over the time period, to accumulate a sustainable pension corpus. In case an Indian QROPS scheme allows entry before 55 years, the vesting age will be 55 years or the minimum investment period of that policy, whichever is higher.

These plans are suitable only for those looking to grow their accumulated UK pension pot and do not need the pension income immediately. These plans also have options to pay regular premiums, enabling the purchaser can opt to make regular contributions and grow the pension corpus in India. For transfer of UK pension to Indian QROPS schemes, purchase through single premium is preferred option.

Death Benefit – All the pension plans have a Death Benefit clause, which describes the terms and conditions of the plan, on the death of the policyholder. It may vary from giving a lump sum to the nominee or transferring the accumulated value to an annuity plan under the nominee’s name or reimbursing all the premiums paid till date.

Surrender Value – There might be cases when a person might wish to transfer his pension back to the UK or any other country. The rules for surrender, vary among the Indian QROPS plans from waiting until 55 years of age or till the policy acquires Guaranteed Surrender Value(GSV) or till the minimum investment period is completed.

Before choosing to transfer UK pension to any pension plan under the recognized QROPS schemes in India, it is important to understand the following important clauses of the pension plans from QROPS perspective:

  1. Entry Age
  2. Vesting Age
  3. Lock-in Period, if any
  4. Minimum tenure of the policy under Indian QROPS rules.
  5. Applicable Rules for Surrender of the policy
  6. Applicable Rules on death of the policyholder
  7. Applicable Costs for the UK Pension Transfer to India
  8. Applicable Costs for the purchase and continuity of the pension plan
  9. Applicable taxes on the acquired vesting benefit/maturity value
  10. Applicable rules for utilization or reinvestment of the acquired final pension corpus

How to choose the right annuity plan among QROPS Schemes in India?

The four Life insurance companies which are authorized by HMRC to offer Indian QROPS schemes, provide Annuity Plans for those who are looking to transfer their pension from the UK to Indian QROPS scheme and start drawing pension immediately. Annuity Plans are designed only to distribute pension income at regular intervals and not to achieve sustainable growth of the invested amount.

The entry age for purchasing an annuity plan under Indian QROPS is 55 years. If a person is purchasing the annuity from the maturity proceeds of an Indian QROPS pension plan, then 1/3rd of the accumulated corpus can be withdrawn without any tax and the rest has to be utilized to buy an annuity listed as recognized QROPS schemes in India, compulsorily.

Another important aspect of receiving payments from an annuity plan is that it is taxable under “Income from Other Sources” as mentioned in the Income Tax Act. The Annuity Plans under Indian QROPS schemes are non-market linked plans and the returns are on the lower side. Also, there is no draw-down option in any of the QROPS Schemes in India, as the invested amount is not accessible after purchase.

Before choosing an annuity plan under Indian QROPS, it is important to be aware of the cost of living in India, the inflation rate and the tax rates applicable for the derived payments. Once an annuity option is chosen, it cannot be modified till the end of payment term of it.

Death Benefit – There is no guaranteed death benefit in annuity plans which are recognized Indian QROPS schemes. However, the annuity may be distributed to the nominee or the purchase price may be returned if the option has been exercised by the annuitant at the time of purchase.

Surrender Value – There is no Surrender value to an annuity plan under Indian QROPS schemes.

Before choosing to transfer UK pension to any annuity plan under the recognized Indian QROPS schemes, it is important to understand the following important clauses of the annuity plans from QROPS perspective:

  1. Minimum Entry Age under QROPS
  2. Annuity Options available – based on income distribution, the term of payments, the number of annuitants etc.
  3. Applicable Costs for the UK Pension Transfer to India
  4. Applicable Cost for purchasing the annuity plan.
  5. Applicable taxes on the received payments
  6. Applicable rules for transfer of annuity to the nominee on the death of the annuitant.

It is important to determine the exact value of the periodic payments the annuitant requires from an Annuity Plan under Indian QROPS schemes, before finalizing on one. The income distributed from it should be sufficient to lead a comfortable life until death and also, dispense sufficient income to the surviving partner if need be.

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