Unexpected QROPS Shake Up

by Andrew Wood

Wherever there is abuse of a system or facility it is always the minority of irresponsible people who spoil the advantages and pleasant effects for the majority.

Qualified Recognised Overseas Pension Schemes (QROPS) appear to be no exception. Since the introduction of QROPS there have been a band of cowboys looking to make a quick buck by abusing the rules and enticing people to use loopholes in the system. They took full advantage and recommended that clients withdraw 100% of their pension scheme from a QROPS even before retirement. They often charged exorbitant fees which people were prepared to pay because they were getting access to a lump of cash which would have otherwise eluded them and which should have been used to provide a pension after they legitimately retired.

One person recently said to me that these loopholes should never have been left open for abuse and that Her Majesty’s Revenue and Customs (HMRC) in the UK should be more mindful of what they introduce. That is just one opinion and what those of us with any amount of ethics know is that the circumstances and intentions surrounding the introduction of QROPS was never to have any loopholes left open to abuse.

The fact remains that when QROPS were introduced HMRC stated very plainly and clearly that transfers of pensions to QROPS were intended to provide an income to sustain members in their retirement. How can anybody justify “busting a pension” wide open and drawing 100% of its value down after reading that intention?

The fact is it has always been crystal clear what the intention was and it is the pension busters who have now made it more difficult for the majority of QROPS members who not only abide by the rules but also abide by the ‘spirit’ of the rules.

Last month HMRC announced new regulations to curb pension busting which they intend to implement with effect from 6 April 2012, the first day of the new tax year.

The changes being proposed are:

1. Substantial changes to the reporting of movements to a member’s QROPS assets. Currently QROPS trustees are obliged to notify HMRC of movements to the scheme funds for the first five years of a member’s residency offshore. Now the trustees will be obliged to report such movements for the first ten years following transfer to the QROPS or the first five years the member is offshore, whichever is the later date.

So, if you are an expat who has been offshore for say fifteen years and you transfer your UK private pension to a QROPS under the old rules the trustees would not have had to report any movements to HMRC as you had been offshore for more than five years. Now the trustees will have to report movements for the next ten years after the establishment of your QROPS.

This will not specifically harm you if you are in a genuine QROPS member who follows the rules. The trustees will be burdened with additional administration which may increase the cost of QROPS fees.

2. New QROPS transfers will require a written statement from the transferring member acknowledging that unauthorised payments to them will be subject to tax charges.

This will prevent pension busters from saying they were unaware of the rules regarding drawdown of their entire pension pots. HMRC will have a document from each new member acknowledging that they are aware they will be assessed for tax on any amounts paid to them from non-complying schemes. This will ensure that advisers give true professional opinions and guidance.

3. Schemes where the QROPS is resident will be required to ensure they are recognised as a local pension scheme by their tax office.

This rule will ensure that schemes are not set up in places where they may abuse the rules without the knowledge of their local tax authority.

4. A QROPS tax exemption in respect of pension benefit payments must be given by the local tax authority to residents as well as non-residents of that jurisdiction.

This means that where pension income is taxed when payment is made to residents it must also be taxable to non-residents. So, in the case of Guernsey, for example, benefits paid to non-residents would need to be taxable in the same way as benefits paid to residents. The intention here is that any withholding tax deducted from payments in say Guernsey would be reclaimable against a tax return for a resident member in say Thailand.

5. There will be a limit to the scope for transfers to New Zealand schemes so that they are only allowed where a scheme restricts benefits to be paid in line with the HMRC guidelines.

Part of the statement issued by HMRC said “Pension schemes established in New Zealand have been used to allow individuals to take their pension savings as a lump sum. Regulations will amend the conditions so that 70% of the funds transferred to certain pension schemes in New Zealand have to be used to provide an income in retirement”.

In addition to these new rules HMRC issued a statement saying:

1. A QROPS should be broadly similar to a UK pension scheme
2. A QROPS member should be in broadly the same position as someone who keeps up their pension in the UK
3. QROPS are only for individuals leaving or intending permanently to leave the UK

The proposed introduction of these rules could affect many expats in the future if they decide to transfer their deferred UK private pension to a QROPS. There are currently no anti forestalling measures which would prevent any member being affected by the introduction of these rules if they have transferred their pension to a QROPS prior to 6 April 2012.  It is also thought that existing QROPS scheme members will not be subject to these specific changes where they have a genuine QROPS and are following a genuine intention to comply with the rules and intent.

For all those members, advisers and scheme administrators who have been involved in pension busting: beware!

One of the unknowns in the introduction of these new rules is how a number of current jurisdictions will overcome the taxation situation where you are resident in one country and your QROPS is administered in another.

As the majority of schemes in these jurisdictions are strictly following the rules there is currently discussion underway to resolve how this will be overcome. For existing members of schemes in such places as Guernsey, Isle of Man, Malta and Jersey I would recommend that you contact your professional adviser to discuss the implications. If you are not confident with his guidance or you prefer to have an independent second opinion you should seek alternative professional counsel from an independent financial adviser who specialises in QROPS.

It is a fact that of the current assets in UK deferred private pension schemes less than 1% has been transferred to a QROPS. You could be one of the expats or other nationals who have worked in the UK and left benefits in a UK scheme which could be transferred out to a QROPS. Remember, the clock is ticking so if you have not already done so it would be wise to act now and ensure you have your scheme transferred before these new rules are implemented on 6 April 2012.

Questions for Andrew can be directed to PFS International on +662-653-1971 or email via enquiriesthailand@fsplatinum.com

You can also connect with Andrew on Linkedin here

Andrew Wood has been an expat in Asia for 32 years and is Executive Director with PFS International. He has been writing Net Worth articles for four years and has made a significant contribution to the PFS library of financial service articles dating back over seven years. These articles which cover the complete A-Z of financial planning are available to readers on request.