A-Day (6 April 2006) produced some radical changes in respect of the rules governing transfers from ...
A-Day (6 April 2006) produced some radical changes in respect of the rules governing transfers from UK-registered pension schemes to offshore pension schemes. Individuals wishing to migrate from the UK are now able to transfer their UK pension funds to an overseas pension scheme, provided it is a 'qualifying recognised overseas pension scheme' (QROPS) and it is registered with Her Majesty's Revenue & Customs (HMRC).
The scheme rules of the QROPS must be broadly equivalent in terms of treatment to a UK-registered pension scheme, and the QROPS trustee must provide HMRC with information on certain 'events'.
For example, a QROPS provider must notify HMRC that a transfer has been made if the individual is resident in the UK at the time or was resident in one of the previous five tax years.
With regards to transfers, they are obliged to report future payments made to individuals who are either resident in the UK in the year of payment or who were resident in one of the previous five tax years. This enables HMRC to establish whether the QROPS has made a payment which, had it been made from a UK scheme, would have been an unauthorised payment.
In the UK, there is a requirement either to purchase an annuity by the age of 75 or enter into an alternatively secured pension (ASP). ASP funds are treated as the top layer of someone's estate on death, and the ASP fund taken into account on death is reduced by any income tax arising from the unauthorised payment charge. The combination of income tax and inheritance tax (IHT) can amount to a total tax charge of up to 82%.
Annuities can be extremely unpopular in the UK, but with a QROPS, there is no compulsion to purchase an annuity.
What has really opened up the QROPS market is that the member need not reside where the QROPS is registered.
A wide range of investments is possible within a QROPS, and the possibilities become more extensive once the QROPS member has been non-UK resident for five complete tax years or more. Furthermore, there is no limit to the size of funds that may be accumulated within a QROPS.
A transfer from a UK-registered pension scheme to a QROPS is a 'benefit crystallisation' event giving rise to an additional income tax charge where the transfer exceeds the individual's lifetime allowance (LTA). Currently, this allowance is set at £1,650,000 (2008/2009 tax year).
However, because the payment is not to the individual, the rate charged is 25% where the member is below normal minimum pension age, not 55%, despite the fact that it involves a lump sum. There will be no effect on the annual allowance as it is not a contribution (although all payments made in the pension input period up to the date of transfer obviously will be).
Legislation contained in the Finance Bill has extended IHT 'protection' to the funds held in a QROPS, and this backdates to A-Day when it was inadvertently removed.
It is always important to assess whether a pension transfer represents good value, particularly where it is from a defined benefit scheme.
Equally, tax is an important consideration. Care should be taken to consider not only whether the income is taxed at source from the jurisdiction where the QROPS is registered, but also the tax treatment in the client's country of residence, in order to avoid double taxation.
Individuals should always seek the advice of a suitably qualified individual who has been granted the relevant permission by the Financial Services Authority.
- Luanne Aherne is technical consultant, tax and estate planning business support, at Scottish Provident International.
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