For HNW or mass affluent clients with large pension pots at retirement, the lure of transferring a pension overseas to enjoy more sunshine, a better quality of life or just to retire abroad is a strong one. QROPS is one way of transferring pensions overseas but it is not without its challenges and pitfalls.

Pensions expert Mike Morrison of AXA Wealth ooks at recent changes in the QROPS regime and asks whether QROPS will retain their attractions. For many Financial Planners, QROPS can be a useful solution to a difficult problem, that of overseas pension transfer, but planners need to keep up with the law and regulatory changes to ensure they give the correct advice to clients.

HMRC draft legislation means that there could be far-reaching changes on QROPS and similar schemes and this will require careful handling by Financial Planners if they are to stay ahead of potentially negative changes and also make the most of any QROPS opportunities that may come their way.

Mr Morrison unravels some of the changes and asks whether planners and their clients can benefit from them. With many years of experience in pensions he is well placed to shed some light on an area that is changing fast.

 

In December 2011, Her Majesty’s Revenue and Customs (HMRC) quite unexpectedly published new draft legislation that could have had far- reaching consequences for many qualifying recognised overseas pension schemes (QROPS) jurisdictions and for some it could have even put their existence as a QROPS jurisdiction into question.

The draft legislation resulted in a lot of discussion, interpretation and legislative change. The new regime, which was clarified in the Budget, will come into effect this month (April 2012). It is worth exploring the background before looking at the new proposals. QROPS were intended as a vehicle for pension transfers for people about to become non-resident in the UK. They would allow people to take control of their pension in the jurisdiction in which they were about to become resident and most importantly to deal with their tax in the jurisdiction where they are tax resident.

However, alongside this has developed a regime of trying to use local pension legislation to maximise cash extraction or to recommend QROPS to UK residents to possibly avoid some UK tax charges.

To start with, an overseas pensions scheme (OPS) must become a recognised overseas pension scheme (ROPS) and then is given QROPS status by HMRC. It can then be transferred overseas. The current requirements for this process are as follows:

• it cannot be a registered pension scheme it must be recognised for tax purposes by the country or territory in which it is established 
• it must be established and regulated as a pension scheme outside the UK.  

In addition the pension scheme must be established in a member state of the European Union, Norway, Liechtenstein or Iceland, or be established in a country or territory with which the UK has a double taxation agreement, or satisfy the requirement that, at the time of the transfer, the rules of the scheme mean that:

• at least 70 per cent of the funds transferred will be designated by the scheme manager for the purpose of providing the member with an income for life
• the pension benefits (and any associated lump sum) payable to the member under the scheme, to the extent that they relate to the transfer being made, are payable no earlier than normal minimum pension age
• membership of the scheme is open to persons resident in the country or territory in which it is established.

Then to get QROPS status the scheme must:

• notify HMRC that the scheme is a recognised overseas pension scheme with any evidence that is required
• inform HMRC of the name of the country or territory in which the scheme is established and/ or confirm that the 70 per cent income rule and minimum retirement age applies
• provide any other evidence required by HMRC notify HMRC if the scheme ceases to be a
• recognised overseas pension scheme provide HMRC with certain information on making payments in respect of certain scheme members.

 

One of the key reporting requirements has been that HMRC is interested in scheme members up to five years after leaving UK residence. Then the legislation of the QROPS jurisdiction takes over and there are no further UK reporting requirements.

HMRC has introduced new reporting requirements for QROPS effective from 6 April 2012. The new rules will apply to all existing and new QROPS and the most significant change is that the conditions that a scheme must meet to be a QROPS have been changed. The new requirement that must be met for a scheme to be a QROPS means that where an exemption from tax in respect of benefits paid from the scheme is available to a member of a scheme who is not resident in the country in which the scheme is established, the same exemption must also be available to a member who is resident in the country.

 

This change will mean that all existing QROPS as at 5 April 2012 will need to reassess whether they meet the new QROPS conditions, and where they do not they must notify HMRC within 30 days of ceasing to meet the conditions.This condition has to apply regardless of the member’s residential status at the time of joining the scheme or during any later period of membership of the scheme. In HMRC words, this new condition is required as some schemes had ‘been used to promote transfers for tax rather than pension saving purposes’. A good example of this is New Zealand, where some schemes had been used to allow individuals to take their pension savings as a lump sum. The new proposed legislation would mean that 70 per cent of the funds being transferred to those schemes in New Zealand must be used to provide an income in retirement.

Proposals in the draft legislation also amend the information a QROPS is required to provide to HMRC and make it clear that any payment out of transfers into the scheme made within 10 years of the transfer (as opposed to five years previously) will have to be reported. The reporting requirement will start from the time of the transfer as opposed to the current timing - the start of the period of non- residency. If the QROPS makes any payments to or in respect of a member after the above 10 years are up, it will still need to tell HMRC about the payment if the member is a UK resident in the tax year of the payment, or has been UK resident in any of the previous five tax years.

 

The proposals also set out the categories of information that HMRC may request from a QROPS and this information will have to be provided within 60 days of the payment, rather than after the end of the tax year. Overall the reporting requirements have become more onerous, with minor changes to be reported as soon as possible. If and when a scheme ceases to be a QROPS, information about the transfer (including name, address, date of birth and the National Insurance numbers of members having made such a transfer) needs to be provided within 30 days of the cessation date.

The new proposals make provision for the scheme administrator to provide HMRC with additional information where there is a ‘recognised transfer’ of a pension fund to a QROPS, including the member’s details, the amount of any sums, the types of assets transferred, their value and details of the QROPS. For me one of the most important changes is the new requirement for a member requesting a transfer to have to sign a declaration to say that they are aware of the potential tax consequences of the transfer they are requesting before the transfer is made. Hopefully this will make possible QROPS transferees ask questions and seek advice before completing such a transfer.

The announcement also confirmed that where a country or territory in which a QROPS is established makes legislation to provide tax advantages that are not intended or available under the QROPS rules, the UK will act so that the relevant types of pension scheme in those countries or territories can no longer be QROPS. There have been no real shocks from the draft to the final guidance and we will get the chance to look at the proposed new rules in detail as they are published. HMRC has had its eye on what it sees as sham schemes, but it also knows that there must be some form of transfer regime.

So what will be the effect on the QROPS market? Since the publication the main jurisdictions have all given views on the effects of the proposals on their schemes. Now we have the new rules we can expect each of those jurisdictions to firm up on their proposals; it appears that some regimes have already lined up legislation change to maintain their QROPS status. Some jurisdictions might go and I am sure others will emerge; I would doubt that all of this will be done quietly!

It will be interesting to see whether there is an advantage to being in an EU jurisdiction (as some have already jumped to show) and whether the reporting requirements for an EU resident moving to retire in another EU regime falls foul of any of the ‘freedom of movement’ principles.

As a final comment, it is still being considered whether the role of qualifying non-UK pension schemes (QNUPS) and some of the issues that could make them attractive as a retirement option will be affected by the new rules. Although this is quite a big topic and, as such, warrants an article of its own.