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Expat Briefing Editorial Team
17 June, 2016
For long-term residents of the United Kingdom with plans to retire abroad, QROPS (Qualifying Recognised Overseas Pension Scheme) provide a neat, tax efficient solution to the problem of pension portability for expats.
What Are 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 QROPS.
For financial advisors, the most common reason to recommend a QROPS is 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, which ranks as the fourth reason to recommend the product to qualifying clients.
Who Qualifies For A QROPS?
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, e.g. investment holdings in addition to cash and cash equivalents, but the process will be easier, the nearer the assets are to being cash.
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" (although, importantly, this does not necessarily mean that the scheme is "approved"). HMRC publishes a list of QROPS fortnightly; as of June 15, 2016, there were 41 jurisdictions on the list.
A few words of warning, however. The list of recognized QROPS operators is not set in stone, and HMRC regularly culls large numbers of administrators deemed to fall outside of the QROPS rules. Notably, Guernsey's days as one of the largest QROPS jurisdictions were effectively ended following the introduction of new tax rules by HMRC in 2012. A similar fate befell Cyprus, a popular destination for UK expats, in August 2012, for reasons known only to HMRC itself. And in mid-2015, the list was reduced from almost 4,000 schemes to 663, with the number of Australian schemes cut from 1,600 to just one.
It cannot be stressed enough that expats ensure they are in full compliance with the QROPS rules in order to avoid a swingeing 55 percent penalty rate of tax.
What Are The Best QROPS Jurisdictions?
It is not the intention of this article to provide financial advice. However, experts in this area suggest that, following the 2012 tax changes, the most secure QROPS schemes would appear to be with an EU provider, and the De Vere Group specifically identifies Malta and Gibraltar: the former is an integral member of the EU, with a highly-regulated banking sector and a sophisticated and transparent tax system; the latter is a member of the EU for financial services due to its UK link.
There were 25 Malta-based QROPS schemes on HMRC's latest list (at the time of writing). However, Gibraltar in particular has come on leaps and bounds as a QROPS location, with its 2.5 percent rate of tax on pension income. Indeed, a poll undertaken by Skandia International in 2013 placed the territory second with 26 percent of the vote as the preferred QROPS jurisdiction in a survey of 141 international advisers who use these schemes – just a year after Gibraltar introduced its QROPS regime.
Albert Isola, Gibraltar's Minister with Responsibility for Financial Services commented: "This independent poll is very good news for Gibraltar and represents a clear recognition of the significant work undertaken in the field of imported pensions by a team of industry and government representatives led by my predecessor Gilbert Licudi QC. I view this area of business as one where Gibraltar can prosper significantly and aspire to market leadership."
Since specific legislation was introduced in 2012, the Gibraltar's finance centre has been highlighting the opportunities in this area and as the Skandia Poll confirms, "in the space of less than a year, Gibraltar has come from nowhere to become a very strong QROPS centre."
Gibraltar's new mandatory QROPS provider Code of Conduct means that practitioners accepting QROPS business undertake comprehensive due diligence measures to safeguard Gibraltar's reputation as a pensions domicile.
The Code warns Gibraltar professionals to be wary of suspect QROPS transfers, and in particular those that exceed the limits on cash distribution set by the Gibraltar government and the UK tax authority. In particular, the Code commits Gibraltar providers to maintain best practice and standards to help guarantee continued adherence to UK Inland Revenue QROPS rules and also sets out policies on "fair" fees and foreshadows the introduction of an industry Ombudsman.
In an effort to demonstrate the territory's compliance with the spirit of HMRC's recent rule change with regards QROPS, the Gibraltar government earlier amended its pensions law to introduce limits on imported pension provisions in line with UK policy. Lump sum cash distributions to persons over 55 years old have been limited to 30 percent, a 2.5 percent tax is levied on distributions, and new restrictions are in place to prevent transfers with jurisdictions that do not enforce sufficient safeguards.
Referring to the risks of money laundering or other potential pension busting arrangements, the Code states: "In any circumstance where the member is unable to identify both the ultimate originator and source of funds, and all subsequent investment steps of the assets under management, that business should be rejected".
"Members need to be acutely aware that a small number of operators in other jurisdictions have more pressure to continue to operate schemes that are non-compliant, and may seek to use conduits operated in other jurisdictions, including Gibraltar," the Code adds.
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, 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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