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by the Investors Offshore editorial team, November, 2012
23 November, 2012
Pity the poor pensioners, in their 50s or 60s, approaching retirement. Annuity rates are falling so fast that anything but a really large pension pot will hardly deliver enough income to pay for the family car, never mind that cruise they had set their hearts on. And in many countries the tax authority will not allow you to cash in your pension pot on the grounds that it is tax-privileged money, plus a dose of nannying - if you take the money and spend it, goes the reasoning, you will fall back onto state support.
One of those countries is the UK, where retirees are allowed to take 25% of their pension pot in cash, with the rest being compulsorily devoted to the purchase of one of those pitifully small annuities. British expats, who have fled the country's horrid climate and prevalent yobbish culture for nicer, warmer places, are in a particularly bad plight financially, with the pound having plunged against most other currencies in the last few years, and especially the Euro, so that their original calculations, which would have allowed them a comfortable retirement in that house in Cyprus they have pinched and saved over thirty years to purchase, have been blown out of the water.
But wait! There is a silver lining for some people, and it's called a QROPS. If a British citizen has become non-resident on a permanent basis, and has no present intention of returning to the UK, they can move their pension fund out of the UK to another country, and it doesn't have to be the country they are living in. For the first five years of non-residence, the fund will remain subject to HMRC's rules, but after that the rules that apply will be those of the destination country of the fund. Such a transferred fund is called a Qualified Recognized Overseas Pension Scheme.
It's a lot more complicated than that, of course, but the eventual benefit is that many countries allow the use of pension funds for the purchase of a house, or in some cases even allow the retiree to withdraw the whole fund in cash.
As Nigel Green, chief executive of the deVere Group, the world's largest independent financial advisory firm, observed in May 2012:
"Annuity rates are at rock bottom and we believe that it's highly improbable that they will rise anytime soon, meaning taking out an annuity is a significant risk. As they are linked to interest rates, which are plummeting, many who have opted for an annuity in recent times have found themselves with a smaller pension than they had hoped for.”
"In addition, the low interest rates are also plunging more and more defined benefits into deficit. Indeed, 80 per cent of defined benefit schemes in the UK are currently in deficit, meaning that many people could find that they simply cannot afford to retire. The majority of defined benefit schemes have now changed their rate of escalation from RPI to CPI and whilst this is good news for a company's balance sheet it does mean that retired employees will receive lower benefits then they expected
"To avoid taking this risk of buying an annuity, an increasing number of those who can - those who live abroad - are moving their retirement funds into a QROPS.
“Low annuity rates are, without question, prompting retirees to take their pensions out of the UK. Since April 2006, when such schemes were first established, more than GBP1.3bn has been transferred out of the UK and into QROPS and, according to official HMRC figures, the amount moved has been increasing year on year.”
It is a trend that the deVere Group expects to continue. "Pensioners are becoming permanently poorer due to low annuity rates and therefore, to safeguard their retirement income, a growing number are transferring their pensions out of Britain and into QROPS," says Green.
Unsurprisingly, in a poll conducted by Skandia International in 2010, advisors cited the most common reason to recommend a QROPS as being that income drawn from the scheme is not subject to UK tax. The wider investment choice allowed within a QROPS is the second most common reason that advisors recommend a QROPS while the lack of compulsion to purchase an annuity if the client holds their pension monies in a QROPS falls third on the list. Advisors also recommend a QROPS due to the fund not being subject to UK inheritance tax on death, although this ranks as only the fourth reason to recommend the product to qualifying clients.
Of the advisors polled, 64% said that an offshore investment bond is the most popular underlying investment for a QROPS, followed by mutual funds (23%), stocks and shares (9%), and then cash (4%).
Rachael Griffin, head of product law and financial planning at Skandia International, said: “As expats continue to retire abroad, we’re seeing a growing awareness of QROPS and the benefits that this type of product offers those who are retiring outside of the UK, which may be why so many advisors are expecting to see an increase in the amount of QROPS business they write. A QROPS can be an appropriate investment for many expats living abroad and offers a level of flexibility, such as different currency options, not found within a UK pension scheme.
Who Can Benefit From A QROPS?
Obviously, the first qualification is that it is necessary to be already non-resident, and to be able to demonstrate, if asked, that this is a permanent state.
The second qualification is that the individual concerned should not already have retired and taken an annuity. That is usually an irreversible step. You can't normally turn an annuity back into cash.
The third qualification is that there should be an identifiable and moveable pension fund. In theory, pension fund assets of various types can be transferred, eg investment holdings in addition to cash and cash equivalents, but the process will be easier, the nearer the assets are to being cash.
'Final salary' (so called 'defined benefit') pension schemes present difficulties. Although most types of public sector pension scheme do have a cash commutated transfer value, which can be used for QROPS purposes, the transfer values are often unattractive, and will not secure an income which measures up to what would have been payable in the UK. Advisers are often reluctant to recommend taking a transfer value, for this reason. Of course, if the choice is between having a British pension in deflating pounds and a lump sum to spend as you wish, the cash will often win, even if the true bargain is not a very good one.
Public sector pension funds are in fact very happy to see departing members take transfer values, since it is a good bargain from their perspective. These schemes are almost never 'funded', but are 'pay-as-you-go', so that if a member leaves with a paltry lump sum, the scheme is free of the costly future benefit stream that would have to have been financed out of current revenues. It is of course one of the most disgraceful frauds practised against the general citizenry of a country that the inflation-proofed pensions of civil servants, parliamentarians and countless other groups of 'public sector' workers are financed on a 'pay-as-you-go' basis. It puts one in mind of W C Fields' famous question: 'What did posterity ever do for me?' Plenty, is the answer, if you are a British civil servant!
Although final salary pension schemes in the private sector are fully-funded (if the actuaries have been doing their jobs), only in rare cases are the funds attached to individuals. That's to say, there is one fund and it covers the present value of all the annuities that are going to have to be paid out. The trustees of the fund (most pension schemes are set up under trust) will not normally agree to segregate portions of the fund and attach them to sub-populations of members. An exception to this might be where the subsidiary of a large company is being bought out, and the appropriate portion of the overall pension fund will rightfully follow the individuals who move. These situations are not well covered by the law, and everything is down to the negotiating process: the head trustees will do their very best to minimize the amount of the fund that they will 'lose'.
As with public sector schemes, transfer values are often available for individuals who leave private sector pension schemes; but they are usually even less attractive than the public sector equivalents, and the same cautions apply.
If you work for the overseas subsidiary of a UK plc and the staff are all resident outside the UK, you could have a go at a corporate QROPS. This isn't actually as far-fetched as it sounds: many QROPS have already been set up by larger companies for their overseas staff, and the process is well understood, although usually these will be contribution-based schemes, ie defined contribution rather than defined benefit schemes. The advantage of a defined contribution scheme from this perspective is of course that each member of the scheme has their own, portable 'mini-fund'. But in theory there is no reason why a defined-benefit scheme shouldn't be split off into a QROPS, if management is willing.
So the bottom line here is that you can only take advantage of a QROPS if your pension is 'portable', in the normal sense of the word.
The state old age pension is an example of a pension which is not 'portable'. The Government is never going to allow the encashment of the present value of the deflating annuity it pays expatriates. It wishes it didn't have to pay them at all, and it was only pressure from the EU that forced the Government to give annual uprating to expatriates' pensions, if they are living in the EU. When pensions return to being 'cost-of-living' linked, rather than the 'average wage' linking that is currently in place, it will apply to all pensions paid in the EU.
Where Can You Take A QROPS?
There are limits however to the list of countries which are suitable destinations for QROPS. HMRC has to approve destination pension fund administrators, and once it has done so, that administrator is 'Recognized'. There is quite a large number of countries which have approved pension fund administrators, and HMRC even publishes a list of them. When you look at this list, you need to distinguish between corporate QROPS as described above, and the types of administrator (often trust companies) which will accept individual fund transfers. It's usually quite easy to do this from the name.
The list of approved (recognized) QROPS operators is however a moving target, because HMRC tries to police the behaviour of administrators on the list, and has removed some countries where administrators went outside its rules, for instance by allowing full cash withdrawal before the expiry of five years of non-residence.
Countries on the list that are commonly used for QROPS include Guernsey, the Isle of Man, New Zealand, Australia and Ireland - there are over forty of them altogether.
Fears that New Zealand could lose its QROPS status over concerns with its Kiwisavers scheme, regarding tax breaks applicable to employer contributions, were allayed in April, 2010, when the issue was reported to have been resolved between HM Revenue & Customs (HMRC) and New Zealand's government actuary, and the Kiwisavers scheme continues to appear on HMRC's list of approved QROPS.
Having come under the regulatory microscope, it emerged in May 2011 that QROPS providers in New Zealand were working together to develop a voluntary code of practice for both product suppliers and advisers.
David Greenslade, Managing Director of Strategi, a New Zealand-based best practice and compliance consultancy heading this initiative, believes that this voluntary code is a sign of the emerging new professionalism within the industry. “When the wider industry realises there is a potential issue with a sub-sector of products or services, it takes pro-active steps to rectify things without having to wait for the regulator or government to initiate change. This bodes well for the industry in the future,” the firm said.
What Are The Mechanics of QROPS?
You need to have a British IFA (Independent Financial Adviser) to pull the strings. Probably you have one already, if you have a private pension fund, but they are easy enough to find, especially nowadays, hanging round almost every street corner, desperate for business. But not all IFAs know about QROPS, so before you decide on one in particular to go with, make sure that they know what they are doing and change horses if necessary. Ideally, the chosen IFA will have a presence in the remote jurisdiction which is going to be the destination for the QROPS transfer, although this is not a legal requirement in any sense, and there are not so many IFAs with a global presence.
The IFA will act as a clearing house for the paperwork. The first step, evidently, is to select the destination country for the QROPS and to pick a pensions trust administrator in that country. This needs close attention, since most advisers tend to have their own favourites. You will be very well advised to do your own direct research before accepting any recommendations that are made to you.
The IFA will also advise you on the process of extracting the pension fund from your pension provider, including if necessary the conversion of illiquid assets into more liquid ones. This may or may not be necessary or desirable; but the setting up of the QROPS is a good moment at which to reconsider the assets you wish the fund to hold. The views of any trustees need to be taken into account at this point, and you also need to establish whether the consent of the trustees is necessary. Usually this will just be a formality, but there are cases in which consent might not be readily forthcoming.
The IFA will construct the pile of documentation that is going to be needed, and take you through it. It will include an agreement between you and the IFA, a consent and instruction form for the provider (an insurance company or possibly the trustees of the fund), and an agreement with the remote trust or pensions administrator. That brings up the question of what you want to happen: perhaps you want to continue with the fund as it stands, and use the greater investment freedom to vary your types of asset; or maybe you want to make a property purchase; or maybe you want to strip out as much cash as possible. This will all depend on your circumstances and the destination country; but these decisions need to be made, and appropriate paperwork generated before the transfer takes place. Remember that, once the fund has left the UK, it is no longer the responsibility of the IFA, unless they happen to have an office in the destination country, although they will remain liable for any advice they have given you.
The IFA will then present the documentation to the pension provider, some of it having passed through the remote pensions or trust administrator, and the provider will take anywhere between two weeks and two months to complete the process of preparing your fund for transfer. What happens then depends on what you have agreed with the remote administrator.
QROPS Fall Victim to UK Tax Crackdown
The UK has, however, extended its crackdown on overseas tax avoidance with the closure of what the Treasury has labelled an unintended loophole for UK residents transferring pension savings overseas.
New legislation, effective April 6, 2011, and included in Finance (No.3) Bill that year, was designed to prevent individuals from taking advantage of a tax loophole that would have emerged on April 6, had the government not taken action on the matter.
HM Revenue and Customs (HMRC) said that the government's intention was to prevent tax avoidance through the interaction of relief for pension savings and the provisions of certain double tax arrangements.
According to HMRC, the legislation provided that, notwithstanding the terms of a double taxation arrangement with another territory, a payment of a pension or other similar remuneration may be taxed in the United Kingdom where:
In the event that tax is paid in the other jurisdiction, appropriate credit will be available against the UK tax chargeable.
Making the announcement was Exchequer Secretary to the Treasury, David Gauke. He said: "The government has set out a clear strategy on preventing tax avoidance. We will not hesitate to take action to stop those who seek to take unfair advantage of unintended tax loopholes", adding that: "The measure demonstrates our commitment to act quickly to close these".
On December 6, 2011 draft secondary legislation to make changes to the system for transfers of pension savings to QROPS was published for an eight week consultation.
In summary, the changes were designed to firm up the tests to be an overseas pension scheme to make the rules work as always originally intended. These included more stringent checks, such as changes to the period in which a QROPS has to report information on payments to HMRC.
One of the key elements of the draft legislation was the ‘tax recognition’ requirement, under which the pension scheme needs to be ‘recognised for tax purposes’ under the tax legislation of the country or territory in which it is established.
According to guidance issued by HMRC which has effect from April 6, 2012, the tax recognition requirement is met if the following three conditions are satisfied:
1. The scheme must be open to persons resident in the country or territory in which it is established;
2. The scheme is established in a country or territory where there is a system of taxation of personal income under which tax relief is available in respect of pensions, and one of three tests is met:
a. tax relief is not available to the member on contributions made to the scheme by that individual or, if the individual is an employee, by their employer in respect of earnings to which benefits under the scheme relate, or
b. the scheme is liable to taxation on its income and gains, and is a complying superannuation plan as defined in section 995-1 (definitions) of the Income Tax Assessment Act 1997 of Australia, or
c. all or most of the benefits paid by the scheme to members who are not in serious ill-health are subject to taxation.
3. The scheme is approved or recognised by, or registered with, the relevant tax authorities as a pension scheme in the country or territory in which it is established.
QROPS In Guernsey
Guernsey has been one of the primary locations through which QROPS funds can be routed, and data from HMRC shows that in the first half of 2011, there were more pension transfers into QROPS in Guernsey than any other jurisdiction globally.
Guernsey differs from Australia and in part New Zealand, in that it is primarily a ‘third country’ QROPS destination, meaning that most of the QROPS transferred to the island are for individuals who have left the UK to live elsewhere, such as in Europe or Asia. Australia’s QROPS market is comprised almost exclusively of those going to the country to live, while the New Zealand transfers are a mixture of third-country QROPS and those of individuals moving permanently from Britain to New Zealand.
In 2008, however, there had been indications that the UK authorities had concerns regarding Guernsey based schemes. The States of Guernsey Treasury and Resources Department therefore instructed the Administrator of Income Tax to contact HM Revenue & Customs in order to identify their concerns and establish how they could be allayed. As a result, in November, 2009, the Guernsey Income Tax Authority introduced further legislation.
Guernsey said talks between the two departments had been "most constructive" and that they were "now acting to maintain Guernsey’s good international reputation in the area". Additional conditions were being imposed on the approval of any scheme which can admit members who are not resident in Guernsey. It was hoped that these new conditions would prevent non-residents transferring money from the UK and then collapsing the fund, avoiding tax on the proceeds.
Conditions were also imposed on transfers from Guernsey approved pension schemes with QROPS status. “There should be no ability to take 100% of the fund as a lump sum,” said Administrator Rob Gray. “These conditions do impose further restrictions on the use of Guernsey schemes for non-residents, but they continue to demonstrate that Guernsey is committed to ensuring that pension schemes are used for the purpose for which they are established – to provide a pension for individuals in retirement".
In March, 2010, it looked as if QROPS regulation in Guernsey was set to be tightened further in order to give greater protection to investors. Pension providers on the island had raised concerns that unregulated advisors were using Guernsey to mis-sell QROPS to investors and, by breaching current regulations, leaving them with tax charges on pension transfers of up to 55% on their total fund.
Onward transfers from Guernsey to other QROPS providers are currently limited to a tax-free cash drawdown of 25% of the existing fund; one proposal was to increase this limit to 30%. There was also a proposal to limit one-off lump sum payments to GBP30,000.
Guernsey QROPS Committee chairman Roger Berry said: "These are only proposals but they have strong backing and if supported at government level will in all likelihood become law."
"Let’s be clear, unregulated advice on pension transfers is occurring in the QROPS market. From a UK-centric perspective, where pension transfer advice is well regulated, that will be an uncomfortable fact and a natural reaction is of disappointment and wonder how this is allowed."
Berry warned investors to be wary of schemes that offer to transfer small sums and schemes that offer to sanction transfers from defined benefit schemes. "Frankly, where there is little room for excuse is the transfer of final salary or defined benefits schemes. Unless the transfer is trivial in size, if your prospective new QROPS trustee is happy to accept such a transfer without independent assessments or an equivalent report being provided to you, alarm bells should be ringing."
Guernsey was, however, hit with something of a bombshell following further tightening of the QROPS anti-avoidance rules introduced in April 2012, and when HMRC published an updated QROPS list on April 12, there were just three Guernsey-approves schemes on, compared with more than 300 on April 5.
It was previously considered that in order to meet the new rules, any scheme wishing to be granted QROPS status after April 6, 2012, would have to offer equal treatment to both resident and non-resident taxpayers. However, it became apparent only days before the publication of the new list on April 12 that HMRC's intentions were otherwise, and that the UK instead sought to significantly restrict the provision of UK tax exemptions on pension transfers.
HMRC indicated that only schemes offered to 'residents only' would be considered qualifying schemes under the new criteria, meaning that QROPS would have to be offered from the same territory as the UK taxpayer is newly-resident in.
Responding to the change following the publication of the updated list, Fiona Le Poidevin, the Deputy Chief Executive of Guernsey Finance, said:
“HMRC had given us an indication that only Guernsey pension schemes for Guernsey residents would remain on their list of QROPS. By implication this meant that they were going to delist Guernsey pension schemes for non-residents. This raised the question as to whether it was just Guernsey being targeted or whether it was going to impact other jurisdictions and in particular, those offering third-country QROPS. What we have determined from the publication of the new list is that, in broad terms, it is Guernsey which has been singled out by HMRC.”
“It is difficult to work out precisely why this is the case. HMRC’s amendments to its legislation contained in the UK Budget were clearly focused on targeting abuses in the system and Guernsey has always upheld itself as a model of compliance with the QROPS regulations. The other major change within the new regulations was that schemes must treat residents and non-residents alike in respect of tax treatment and Guernsey took quick and decisive steps to introduce a new category of pension scheme, known as s157E, which was designed to meet the revised criteria for a QROPS."
“Therefore, it is confusing and frustrating that HMRC has now delisted almost all Guernsey schemes while most of those from other jurisdictions remain listed as QROPS. We accept that HMRC has the right to make its own rules regarding the treatment of UK tax relieved schemes but it needs to be an open and fair process.”
“The current actions have been introduced without warning, lack transparency and appear discriminatory. Indeed, HMRC seems to have set aside its own rules to meet an unpublished policy objective."
“The whole situation is made even more puzzling by the fact that HMRC’s original consultation document [said] that the changes would have a ‘negligible impact on receipts’ to the UK exchequer."
“If this situation is not resolved then it could potentially have an impact on around 200 jobs in Guernsey but it must be emphasized that existing members are fully protected and existing schemes will need to continue to be serviced. In addition, Guernsey has always proved very adaptable in the past and so we would be hopeful that any job losses would be limited by the demand for skilled labour in traditional fiduciary businesses, the funds, insurance and banking sectors or other new and emerging areas of the finance industry.”
“Of course, it should not be forgotten that HMRC has not just delisted Guernsey pension schemes for non-residents but it has also delisted many which are for Guernsey residents only. I think that there is an element of confusion here due to the fact that most schemes with Guernsey residents only may not actually have that specified within the scheme any more than UK schemes would do so. No doubt this will be corrected in the very near future by HMRC but the fact that the Guernsey government scheme for public employees has been delisted serves as an illustration as to the extent to which this is an unjust attack on Guernsey."
In July 2012, the Guernsey government announced proposals to revise its Section 157E pension scheme structure in an effort to have it recognized by HMRC as a legitimate QROPS that can accept both resident and non-resident taxpayers.
Under the proposed amendment, announced by Guernsey Treasury Minister, Gavin St. Pier, the island's Section 157E pension structure would be reverted back to its pre-existing form - undoing amendments aimed at complying with the new rules - but would add new taxing provisions on pensions transferred by non-residents to ensure equitable taxation between resident and non-resident persons.
According to St. Pier, the plans would involve income from occupational pension schemes being taxable for non-residents as well as residents, by removing the exemption for pensions and annuities paid in respect of services performed wholly outside Guernsey. The payer of a pension or annuity would be required to deduct tax whether or not the recipient is resident in Guernsey and whether or not the services which led to the payment of that pension or annuity were performed in Guernsey.
Secondly, a legislative amendment will remove the exemption from tax on annuities and lump sums paid to non-resident members of approved retirement annuity schemes and retirement annuity trust schemes. This will mean that such annuity income or lump sums will be taxable on the same basis as if paid to a resident of Guernsey, albeit subject to Guernsey provisions that allow for the exemption of certain lump sums from taxation.
Rex Cowley, principal of the Jersey-based New Dawn Consultancy told International Adviser that in essence the plans seek to enable Guernsey to "potentially tax all payments from a Guernsey pension at the domestic rate of tax, i.e. 20%, but allow an exemption on certain lump sum payments, in order to create the ability to revive a tax free [benefits commencement] lump sum, i.e. 30%. The net result is 20% tax on pension income, with a 30% tax free lump sum, irrespective of the member's residence.”
The proposals were brought before the island's legislative assembly, the States of Guernsey, in September, but, if adopted, will have retrospective application from June 27, 2012.
The number of Guernsey-approved QROPS had grown to 28 according to the list published by HMRC on November 19, 2012, and it remains to be seen whether Guernsey’s QROPS market will return to its former levels.
QROPS in the Isle of Man
The Isle of Man, like Guernsey, has also seen much of its QROPS business come and go as a result of changes to UK legislation.
Back in October, 2010, the Isle of Man’s parliament approved an order creating a new type of pension arrangement that added to the Island’s existing local and international pension legislation, reinforcing the Isle of Man’s reputation at the forefront of international pension provision.
In addition to providing a new retirement savings option for Island-based members, the possibility of QROPS status for pensions approved under this new arrangement gave the Isle of Man’s pension sector increased opportunities to market these schemes to British expatriates who have retired outside the UK.
As well as having the ability to utilize pension drawdown applicable to Isle of Man personal pension schemes, a lump sum of up to 30% of the fund is available. Any payment made from the new scheme to a non-Isle of Man resident was paid gross and was not be subject to Isle of Man income tax.
Minister for Economic Development, Allan Bell commented at the time that: “This new pensions regime shows that the Isle of Man continues to be the leading jurisdiction for professional, innovative, well-regulated pensions. I am sure this will be welcomed by the Isle of Man pensions industry and will enable them to increase the amount of business placed in the Isle of Man”
In June 2011, it was announced by the Manx government that pensions written under Isle of Man 50C pensions legislation were appearing on the list of QROPS shown on the UK tax authority's website, following completion of a review by HMRC, further strengthening the Isle of Man as a leading QROPS jurisdiction.
However, transfers to Manx 50C schemes were subsequently excluded from the HMRC approved list as a result of the changes announced in the March 2012 UK Budget.
In a stoic response from the Isle of Man, Treasury Minister, Eddie Teare stated: “The UK has made clear that it wishes a QROPS to be broadly similar to a UK registered pension scheme. Although I am disappointed that our 50C schemes can no longer be QROPS, the Isle of Man retains a powerful international pension management offering through having both occupational and personal pension schemes which can be approved as QROPS. We can move on from this point to further consolidate our position as a key pension management jurisdiction and continue both to grow and diversify our economy.”
Other schemes, established under the Isle of Man Income Tax (Retirement Benefits Schemes) Act 1978, and Part I of the Income Tax Act 1989, have however been approved.
QROPS in Jersey
In April 2012, the Jersey government announced the launch of a new Jersey-based pension scheme, the Recognized Pension Scheme (RPS), which provides a structure compliant with UK law following changes to UK rules regarding QROPS.
To qualify as a RPS, a pension scheme would need to meet the following requirements:
It must be based in Jersey;
No benefits can be paid out of the scheme until the member reaches the age of 55 (except in cases of the member’s death or the member suffering serious ill-health);
At least 70% of the funds in the scheme must be designated to provide the member with an income for life;
Benefits may only be paid to a limited category of other people on the death of the member; and,
No Jersey tax relief will be available for contributions made to a RPS and no Jersey tax will be payable on benefits paid out of a RPS.
The RPS could be used for pension transfers from the UK. Those seeking to utilise the vehicle would continue to benefit from the exemption from UK tax upon transfer as the scheme has been designed, with support from the finance industry, to comply with the new QROPS rules.
While the RPS may be used internationally in many different markets, it is estimated that accepting transfers from UK schemes alone could generate tax revenues of approximately GBP1.2m per year and create an additional 120 jobs.
In line with the required changes, the RPS will also be available to Jersey residents, although in practice most Jersey residents will find it is more effective to save through existing domestic pension schemes, which offer immediate tax relief on pension savings.
QROPS in Gibraltar
In May 2012, the Gibraltar government published a Bill that would amend the territory's legislation to allow local practitioners to offer QROPS under a regime compliant with new rules set by the UK tax authority.
The legislation, which was due to be tabled before Gibraltar's in the summer of 2012, imposes requirements, restrictions and taxation on QROPS in an effort to meet each of the requirements. In particular the legislation proposes:
The Minister with responsibility for Financial Services, Gilbert Licudi, highlighted the importance of the legislation, which he said would ensure access for Gibraltar practitioners to engage in the administration of QROPS. He said: “It opens up a line of business which has previously, in effect, been out of reach for Gibraltar. It will create work for pension schemes administrators and will also create income from taxation for Gibraltar in respect of distributions from the imported pension schemes."
"It is important to stress that these changes will not affect in any way the benefits which Gibraltar pensioners get from their current pension schemes. The proposals only apply to certain pension schemes established outside Gibraltar and which are subsequently transferred to Gibraltar," he added.
The amendments will not affect the rules governing those occupational pension schemes which have been or may be established in Gibraltar where distributions are taxed at a zero rate, he clarified.
What About QNUPS?
Qualified Non-UK Pension Schemes, or QNUPS, are a new addition to the UK's overseas pension schemes, having been introduced in February 2010 by the Inheritance Tax (Qualifying Non-UK Pension Schemes) Regulations 2010.
One of the main advantages of a QNUPS is that it doesn't have to be included in a person's estate, and therefore, with the appropriate planning, funds and assets contained within a scheme will not incur inheritance tax, which at the moment stands at 40% of the value of an estate above a GBP325,000 threshold (the threshold was frozen for a period of four years in the 2010 Budget) in the UK. Death duties can also be avoided in the country of expatriation.
Another major advantage of a QNUPS scheme as compared to a QROPS is that there are no reporting obligations to HMRC. This means that unlike a QROPS, which are only available in countries which have a double taxation treaty with the UK and which remain under the watchful eye of the UK tax man for the first five years, a QNUPS can be used in a much wider choice of jurisdictions.
The scheme is also very flexible in a number of other respects, including:
The deVere Group, a prominent independent consultant on QROPS with close to GBP100m under advice on offshore pension schemes, representing nearly a quarter of all UK transfers to offshore pension schemes in recent years, believes that QNUPS will provide "many new benefits for people who live overseas".
"Pension schemes and effective retirement planning are essential for the rising number of people who choose to relocate or retire abroad. In recent years, Qualifying Recognised Offshore Pension Schemes enabled investors to transfer their frozen UK pensions overseas, and now the introduction of QNUPS promises another potential tax efficient way to save for retirement," the firm says. "These new schemes will benefit from a UK inheritance tax exemption in respect of UK tax-relieved funds that have been transferred to the QNUPS and will offer expatriates the option to continually pay money into a scheme once they have retired abroad, something that they were not entitled to with a QROPS.”
Angela South, managing director of Magna Wealth Management, believes that investors looking for a safe home for their surplus funds should take "a long hard look at QNUPS".
“It became clear in certain cases that clients could not yet take advantage of QROPS, either because they had not lived abroad for five full tax years, or because of their age,” she said. “For those who own substantial assets and want these assets to grow in a tax-efficient pension and most importantly want to protect their assets against UK Inheritance Tax, then QNUPS is definitely something they should be considering.”
“You can transfer cash, assets or family wealth into a QNUPS and there is no absolute limit on contributions into a QNUPS," South continued. “Very substantial contributions are generally allowable, subject to your status, but you should personally retain enough assets to live on prior to retirement.”
“From age 55 you can take up to 30 per cent as a lump sum paid without deduction of any tax," she added. "If you need cash before age 55 you can take out cash, generally tax-free, as a loan."
However, South observed that the financial services market has been slow to pick up on the advantages that QNUPS offer because, in many cases, "the benefits seemed too good to be true".
QNUPS, then, are still a relatively untried and untested pension scheme, and QNUPS providers are still quite thin on the ground as compared to providers of QROPs. It remains to be seen how QNUPS schemes will work in practice, and there is always the risk that HMRC will legislate away some of tax benefits through new anti-avoidance legislation. They will also not be suitable for everyone, despite their obvious advantages, so, as ever, the mantra for anyone looking to take out a pension scheme should be to do your homework and take independent advice.
Self-Invested Personal Pensions were first introduced in the UK in 1989 and were originally seen as a ‘Rolls Royce’ scheme that would appeal to those on high incomes or with substantial net worth.
As the name suggests, SIPPs allow individuals to take greater control over what they can put into a pension pot and how cash contributions can be invested.
Legislative changes introduced in the UK in 2006 (pensions ‘A-Day’) designed to simplify pension rules have made SIPPs more accessible to a wider range of people, but in reality they remain more suitable for those with the requisite investment knowledge and financial means.
Since A-Day, individuals can invest in just about anything, usually via a SIPP. New permitted investments were thought likely to include the more exotic ‘alternative’ assets. However, when then Chancellor Gordon Brown presented his annual 'pre-budget' report in December, 2005, he announced that the new SIPPs regime would not admit fine wines, antiques, classic cars or residential property held for personal use as permitted assets. This came as a big disappointment to many savers who had expected to be able to buy second homes with their pension pots.
While it is not permissible to invest directly in residential property, it is possible to do so via a property fund which has at least 10 investors and owns at least three properties worth a minimum of GBP1m.
However, the new pension rules do permit investors to buy commercial property, which can be purchased outright or by using a loan of up to 50% of the value of the pension fund. The property can either be used to provide rental income for the pension plan, or can be retained for personal use, which makes it a suitable investment for small business owners looking to purchase their own business premises.
The following investments also qualify for inclusion into a SIPP: shares quoted on a recognised UK or overseas stock exchange; unit trusts; investment trusts; government securities; traded endowment policies; bank and building society deposits; insurance company funds; National Savings investments; open-ended investment companies; and futures and options. Other pensions, such as occupational pension schemes, can also be transferred into a SIPP.
One of the main advantages of a SIPPs wrapper is that an individual has greater freedom to ditch poor-performing investments in favour of more promising opportunities, meaning that there is potential for increased returns. The downside of course is that most investments have the potential to lose as well as win, and obviously the riskier the investment, the more chance there is of losing money, therefore an investor needs to decide how aggressive they want their investment strategy to be. It must also be remembered that returns need to be generated with an eye to the long-term. Some types of investment instrument, such as commodities, have the potential to deliver strong short to medium-term term gains, but may lose heavily over longer time frames.
With a SIPP, income can be taken from the age of 55 (50 prior to April 2010) provided there are sufficient funds in the pension pot. It is possible to take 25% of a SIPP fund as a tax free lump sum upon retirement. The remaining 75% must be left to provide pension income. With the appropriate planning, SIPPs can also be made available to an individual’s beneficiaries free of inheritance tax.
SIPPs also benefit from income drawdown, which means that the requirement to purchase an annuity can be avoided until the age of 77.
SIPPs are subject to the same tax rules as other personal pensions in the UK, which have become less attractive since tax relief was restricted in the 2009 Budget.
Further changes were introduced to pension tax rules earlier this year affecting tax relief on SIPPs and other wrappers. For the tax year 2012/13 the level of contributions on which personal tax relief is granted is up to 100% of UK earnings (from employment or self-employment), subject to an annual allowance of GBP50,000, (previously GBP255,000). Other restrictions have included a drop in the lifetime allowance from GBP1.8m to GBP1.5m.
A large market has now grown up catering for those wishing to invest their pension through a SIPP, and providers range from the large pension companies and financial institutions to more specialist boutique SIPPs providers. The latter group will tend to offer a more comprehensive array of SIPPs products allowing individuals to invest in a more diverse set of assets and instruments, although one must bear in mind that the wider schemes tend to have higher fees, and that there is little point in using a comprehensive scheme if certain investment options are unused or simply not needed.
Usually, there will be charges and fees for things like: setting up a SIPPs; transferring in funds from another pension; buying and selling certain investments; and property purchases and sales. Additionally, there are usually annual fees and exit charges.
Costs, therefore, can mount up so it pays to shop around. And as with all pension and investment decisions, careful research should be carried out and independent advice sought before the plunge is taken.
A Small Self-Administered Scheme (SSAS) is a company scheme where the members are usually all company directors or key staff; such schemes are normally set up by a trust deed. These schemes are ideally suited for shareholding directors of small to medium-sized limited companies.
A self-administered scheme, like a SIPP, allows members and employers greater flexibility and control over the scheme's assets. SSASs are also subject to the same investment rules as other pensions, including SIPPs, meaning that they can invest in the same list of assets and instruments as described above.
Contributions paid to a SSAS are subject to the same rules as other registered pension schemes. However, unlike most pension arrangements there is no requirement to make regular contributions to a SSAS, thus giving a company the flexibility to adjust contributions and investments in leaner years. Employer contributions are normally deductible against corporation tax provided that they are wholly and exclusively for the purposes of the employer's trade.
SSASs receive contributions and transfers in the same way as SIPPs and retirement options are also the same. Within a SSAS, however, the accumulated funds of all members can be used to purchase an asset, and a loan can be made to the sponsoring employer. Such loans are subject to certain restrictions by HMRC, including that:
Shareholdings in the sponsoring employer should not exceed 5%. Shares can also be bought in more than one sponsoring employer as long the total holdings are less than 20% and shares in any one sponsoring employer are less than 5%.
Schemes with less than 12 members and where all decisions are made unanimously or have an independent trustee, are exempt from the trustees' knowledge and understanding requirements of the Pensions Act 2004 and the member-nominated trustee requirements. If every member of the scheme is a trustee, the scheme will also be exempt from the Internal Disputes Resolution Procedure requirements.
SSASs are subject to the same tax rules as other UK pension schemes, and, as is the case with SIPPs, recent legislation restricting pension tax relief has taken the gloss off the tax advantages of investing in an SSAS.
Indeed, according to research carried out by Investec Bank based on a survey of 100 independent financial advisers (IFAs) across the UK in 2011, while demand for SIPPs and SSAS wrappers has increased recently, fund flows are likely to be reduced as a result of the reductions in tax relief.
Almost two thirds of IFAs predicted that changes to the tax relief system will negatively impact contributions into SIPPs and SSASs. Nonetheless, since the new legislation was introduced in April, around three quarters of IFAs surveyed have seen no change in the volume of SIPP/SSAS business, while a fifth of pension-focused IFAs have seen an increase in this type of business. Of those IFAs to have seen an increase in business, 30% said that it has increased by more than 20%, with one in ten seeing an increase of more than 30%.
Investec argues that part of the reason for the increased activity in SIPP and SSAS investments is investors’ desire for greater control over their pension investments. At the same time, it is noted, more IFAs are using wrap platform technology to offer their clients access to a broader range of funds and managers across a range of sectors.
Those IFAs surveyed said that their clients have on average almost 10% of their SIPP/SSAS assets held as cash deposits, equating to some GBP37,800. However, Investec has warned that many investors are losing out on higher returns because the cash element of their SIPP or SSAS is held in a deposit account paying a poor rate of return.
Lionel Ross, speaking on behalf of Investec, commented: “Investors appear to be looking at SIPP and SSAS wrappers as an effective way to manage their pension investments in a low base rate environment and while equities remain volatile. More wrappers are migrating on to the UK wrap platform market, offering an even wider range of assets...Cash continues to play an important role in any SIPP or SSAS portfolio; whether that role is to ride out turbulent markets or achieve greater flexibility but investors ensure their cash is held in an account offering a fair rate of interest.”
Robert Graves, Head of Pensions Technical Services, Rowanmoor Pensions, added: “The fact that SIPP and SSAS volumes have continued to increase despite recent rule changes is testament to the added value strengths of these products. However, part of the success story is that these products are used by those who have already built up pension funds through making tax-advantaged contributions in the past. New generations need incentives, such as the current tax relief available, to save for retirement too. Therefore it is not surprising many IFAs expressed concern that reducing tax relief would be detrimental.”
Graves concluded: “Investment flexibility, particularly in turbulent investment times, is important. Those who wish to avoid the current volatility witnessed in some markets may seek the relatively safe harbour of cash deposits. With this research indicating that an average of 10% of assets in SIPPs and SSASs being held as cash, it is important that IFAs use SIPP and SSAS products that can readily facilitate the use of competitive cash deposit accounts.”
What Will It Cost?
This is not a cheap process. There are a number of stages, outlined below, at which costs may be incurred. As a general rule, if you want to end up with a cash fund in a remote destination, to use as you wish, you should assume that it may cost up to 10% of the value of the fund. If you want to continue with a comparable fund, but simply in different hands, it may be significantly less than that.
That's obvious, of course, in all situations. But the QROPS transfer process does have quite a few potential dangers of its own. You need a good IFA, naturally, but once the fund has left the UK, you need a comparable adviser in the remote destination, unless you are merely using the remote trust administrator as a 'post office'. Even then, you should satisfy yourself that they are trustworthy. And you should make very certain that during the transfer process itself, your fund does not pass outside the control of the trusted parties you have included in the process.
It should also be said that HMRC has considerable reservations about some of the QROPS channels currently being exploited, particularly when they involve full cash alternatives, and may move against individual fund-holders who use what it considers to be unacceptable schemes. This danger exists during the first five years of non-residence, but after five years there is nothing that HMRC can do, unless of course you return to the UK!
All of that said, the costs and difficulties of the QROPS process are well worth accepting if the result is to prise your savings out of their restrictive UK strait-jacket!
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