Pensions update – The new and shrinking landscape of QROPS, part 1

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Recent legislation changes

A while ago, MBMG penned an article for on Qualifying Recognised Overseas Pension Schemes (QROPS).  Back then we warned that the Chancellor, Alistair Darling, would not be happy with the income tax revenue that he was losing via the transfer of pensions away from Her Majesty’s Revenue and Customs (HMRC) jurisdiction and that if the mis-selling continues, this could give the government an excuse to close this potentially lucrative vehicle that expatriates may benefit from.

Needless to say the mis-selling of QROPS carried on unabated, mainly via New Zealand, where the schemes allowed people to take 100% of the value of their pensions out from day one.  As the principle behind QROPS is that the Trustees enter into a spirit of cooperation with HMRC to provide an income for life for the pensioner, clearly HMRC were very unhappy with this state of affairs.  Subsequently new draft legislation was announced in December 2011 that outlawed this practice from April 2012, leaving anyone who had taken this option looking over their shoulder in fear of a large tax bill from HMRC.

As well as stopping “pension busting”, the encashment of 100% of the funds, the stricter legislation also effectively closed many third party jurisdictions to new business.  The most high profile casualty of this new legislation is Guernsey, despite the islands attempt to realign its pension legislation to fit within HMRC’s new rules.  HMRC quoted a vague but all encompassing statement within the new legislation to shut the door on over 300 Guernsey QROP schemes.  Guernsey is considering its options in fighting back; however, history has taught us that battles against HMRC are rarely won.

The legislation stated that pension schemes in “countries or territories will be excluded from being a QROPS” where this jurisdiction “makes legislation or otherwise creates or uses a pension scheme to provide tax advantages that are not intended to be available under the QROPS rules”.  HMRC have deemed that the formation by the States of Guernsey of their new 157E pensions to fit within the new rules actually contravened this legislation, however.

This lead to the States of Guernsey Treasury Minister, Charles Parkinson stating, “It is now clear that the UK want to scrap the idea of third party jurisdiction QROPS altogether.”  “Third Party Jurisdiction” is referring to Guernsey, Malta or New Zealand as the third party, where the first party is the UK and the second party is your selected retirement jurisdiction, like Thailand for example.

With the UK Chancellor George Osborne increasing the pressure on HMRC’s Chief Executive, Lin Homer in “tackling tax avoidance and evasion” to raise more revenue, it is clear that HMRC will tighten the screw wherever they can to try and dig the UK out of its fiscal deficit.

It is also worth remembering that back in August 2010 The Department for Work and Pensions issued a consultation paper proposing a ban on contracted-out defined benefit schemes (also known as final salary schemes, where your pension income is based on number of years of service and your salary at retirement), transferring to defined contribution schemes (where your pension will depend on the contributions that you have made and the subsequent investment performance of your pension fund) from April 2012.  This was met with a vast amount of resistance from the pensions industry and was not enacted; it would have stopped many expatriates transferring to QROPS, however.

HMRC let the QROPS genie out of the bottle in April 2006, probably not realising how big the QROPS market place could become.  So far GBP 1.8 billon has been transferred to QROPS; however, it is estimated that the potential total value of the QROPS market is GBP 650 billion.  Now more than 5 million Brits live abroad with nearly 1,000 people more leaving the UK every day.

Obviously the income tax revenue that is being lost to HMRC is substantial and could increase exponentially.  With the debt that the UK already has, it needs as much tax revenue as possible.  Therefore, how long the remaining third party jurisdictions stay open for new business remains to be seen.

Why we currently have QROPS

So if the government is slowly squeezing the life blood out of QROPS, you may wonder why HMRC set them up in the first place.  This was due to the Maastricht Treaty and the subsequent federal directive, allowing the “Freedom of Movement of Capital”.

It took over 12 years after the Maastricht Treaty was ratified in Nov 1993, but when the UK Government 2004 Finance Act came into law on 6th April 2006, QROPS were born.

The Maastricht Treaty formalized the European Union, and with it the “four freedoms” which form the underlying principles of the Union. These are the freedom of movement of people, goods, services and – significantly for expat pensioners – the freedom of movement of capital.

We have QROPS due to an EU directive, not due to any generosity on behalf of HMRC.  Why would HMRC close down all the Guernsey QROPS, knowing that this will only mean that this business is placed via Malta or New Zealand?  Quite simply, because HMRC will be looking for any tenuous reason to close these other jurisdictions, provided that they are not contravening the EU “Freedom of Movement of Capital” directive, in their quest to increase tax revenue.

Why you should act now

Anyone who believes that third party jurisdiction QROPS will be around forever has no grasp of the fiscal deficit that the UK is in and is being quite naive.

I understand the argument that you could move your pension to a Self Invested Personal Pension (SIPP) now and on to a QROPS later, to save on Trustees fees.  However, if the door slams shut on third party jurisdictions you will be left paying a lot more in UK tax for ever more, with no intention of ever returning to live there.

Nobody foresaw the recent legislation and the very sudden demise of Guernsey QROPS. You may rest assured that when the time comes for New Zealand and Malta, things will happen very quickly again.  The last thing HMRC wants is to give everyone 6 months notice so they can comfortably move their pension funds to a QROPS and deny HMRC the revenue.

QROPS are not for everyone, however, and it is important that you receive good unbiased advice in this area.  You should ask for a transfer analysis that, in the case of transferring final salary schemes will give you a critical yield analysis both before and after retirement to see if the numbers add up.

However, with the yields on 10 year UK Government bonds dropping to 1.81% at the time of writing, the lowest level since the Bank of England started keeping records in 1703, current transfer values on final salary schemes are at an all time high.  Procrastination could prove very expensive indeed.

Since my last update there has been several new QROPS Trusts launched in the market place, as well as several generic developments within the world of pensions, courtesy of HMRC, that will have an impact on QROPS going forward.

Therefore, next week, I will break this Update down into subsections to enable you to read what you believe is pertinent to you.

To be continued…

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]