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Qualifying recognised overseas pension schemes

An update from Blacktower Financial Management Group Limited regarding HMRC’s proposals for overseas transfers of pension savings.

by Paul Beckwith [email protected]

Paul Beckwith is an International Financial Advisor working with Blacktower Financial Management (International) Limited.

It is now one month since Her Majesty’s Revenue and Customs (HMRC) issued their draft forms and notes of completion regarding Overseas Transfers of Pension Savings.

HMRC further issued draft guidance on December 20 in relation to the changes to the system for transferring pension savings to a QROPS, which was the subject of the eight-week consultation period ending January 31.

As reported, HMRC surprised the QROPS industry on December 6 with a package of proposed changes to the rules that govern how UK taxpayers may transfer their UK pensions overseas.

The changes were aimed at cracking down on reported abuse of QROPS by some practitioners as well as an effort by HMRC to tighten up its oversight of the industry. The new legislation, if enacted, would take effect from April 6.

In the past month or so, a great deal of work has been undertaken by the Guernsey Association of Pension Providers (GAPP), and the Guernsey Income Tax authorities to ensure the best possible outcome for Guernsey as a continuing jurisdiction for QROPS.

These activities have included preparing a response from GAPP to HMRC as part of the consultation process, which may result in alterations to the initial drafts issued in December last year, or may result in a deferral in their implementation, (as was recently seen with the statutory residence test proposals which have been delayed until 2013).

Guernsey’s QROPS industry has become a significant local employer in recent years and, for this reason, pension industry providers on the island are optimistic that States of Guernsey lawmakers will approve the proposed scheme when it comes before them for a vote on March 6.

As currently drafted, the proposals will require a 10 year reporting period to HMRC but the five-year member payment provisions remain unchanged. Thus, for existing members, taking the worst case scenario where current schemes lose QROPS status (which now seems very unlikely) at April 6 this year, the impact for existing members does not appear significant (nor as currently drafted, retrospective).

In fact, as a non-QROPS, such schemes would have no reporting requirements to HMRC, but the original transfers remain authorised. This contrasts with previous schemes that have lost QROPS status in other jurisdictions, as in fact, such schemes never actually qualified for QROPS status, and thus created unauthorised transfers.

In its response to the proposed changes, the Guernsey Association of Pension Providers (GAPP) has said it agrees that most of the proposed changes are appropriate, but takes issue with what is known as the “Condition 4” clause, which effectively means that residents and non-residents must be treated equally in terms of tax on all QROPS scheme benefits paid.

This is where the proposed new Guernsey pension scheme, which the Guernsey lawmakers will consider in March, comes in. The as-yet-unnamed scheme would treat Guernsey residents and non-residents the same – with no Guernsey tax due on benefits paid – in order to meet HMRC’s concerns.

Currently, Guernsey, like most QROPS jurisdictions with a significant non-resident QROPS industry, have tended to tax their residents’ pensions but not those of non-residents, who were assumed to pay tax on their pension income in the country in which they lived.

For this reason, the proposed new Guernsey pension structure does not provide tax relief on pension contributions to Guernsey residents – unlike the pension structure currently used by most Guernsey residents. This is seen as reducing the likely decline in tax revenue to Guernsey that would result from the sudden loss of pension tax income if many residents were to suddenly switch to the new, nil-tax-on-benefits-paid, regime.

It is not known how many Guernsey residents are employed by the QROPS industry, but anecdotal evidence suggests that it has grown considerably since Qualifying Recognised Overseas Pension Schemes were created as part of HMRC’s overhaul of Britain’s pensions industry in 2006, known as A Day.

The Freedom of Information Act data obtained by Guernsey-based Concept Group from HMRC revealed that 32% of total UK pensions transferred abroad in the first part of 2011 went to Guernsey, making it the No. 1 jurisdiction worldwide in current transfers. In terms of total transfers since 2007, it is in third place, with 10%, behind Australia (47%) and New Zealand (23%), the data shows.

For clients that are intending to retire abroad, a QROPS product could be the right solution for them. But, like any pension arrangement, QROPS are long-term investments that require thorough research before recommendation.

Blacktower will do its best to ensure that is has compliant QROPS schemes after April 6, 2012 and is working diligently to this end. Blacktower welcomes the fact that henceforward it will be working on a more level playing field and that certain jurisdictions formerly used to paying Pension Commencement Lump Sum beyond 30% have been curtailed.

This facility is not suitable for all expatriates and we recommend that advice is sought before one makes any commitment. 

As an Independent Financial Adviser, Blacktower seeks to ensure that our clients receive the advice suitable for their specific circumstances. Please contact us for further details on 289 355 685.

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