Mike Morrison clarifies the issues surrounding QROPS?
A few months ago I wrote an article for Retirement Planner (May 2008 issue) on QROPS (Qualifying Recognised Overseas Pension Scheme) as it was rapidly becoming a subject that was raised at nearly every IFA meeting I attended.
In that article I only really had the space to examine some of the technical details rather than some of the wider implications of the new scheme.
I think the fears of many were realised when HMRC withdrew QROPS status from those schemes that were based in Singapore, the schemes which perhaps had the highest visibility. It is not within the scope of this article to comment on the whys and wherefores of particular cases but it does leave financial advisers with something of a conundrum.
It is possible to do all the necessary due diligence in researching the right scheme only to find the scheme you have chosen no longer has QROPS status.
In this respect, I think it is vital to realise who a QROPS is aimed at, i.e. for the increasing number of people who are going to live and retire abroad. This includes UK residents who are moving away from the UK but also non-UK residents who are working in the UK, internationally mobile employees who intend to retire to another country and become subject to the prevailing tax regime. I am not sure that HMRC anticipated that some of the key offshore planning centres would seek to be part of the market.
This means that the existence of a Double Taxation Treaty and the concepts of 'residence' and 'domicile' are likely to be important when it comes to tax liability, particularly on death.
From various headlines in the trade press it is clear that HMRC is looking closely at QROPS, particularly if they are being used for 'trust busting' or trying to avoid UK tax.
What happens if a payment is made to a scheme that subsequently loses QROPS status?
My understanding of HMRC's practise in certain circumstances is as follows, however every situation needs to be looked at on a case by case basis:
- If a QROPS had asked to be removed from the website list but it was still a QROPS, a transfer made to it before removal would be treated as an authorised payment.
- If a scheme was eligible to be a QROPS when it applied and has had its status withdrawn because it failed to comply with the information requirements about transfer members, a transfer made to it before the withdrawal would also be treated as an authorised payment.
- If HMRC had discovered that a scheme's original representation that it was a recognised overseas pension scheme, was inaccurate, any transfer made to that scheme from a UK registered pension scheme after 5 April 2006 would be an unauthorised payment. Generally an unauthorised payment made in these circumstances could be liable to tax by reference to the value of the amount transferred. Any tax charge recouping the tax relief given on the fund will depend on the circumstances of each individual case.
Where do we go from here?
Well, the world of QROPS is full of rumours - I have heard that there might be further guidance from HMRC in the pre-Budget report in the autumn; I've also heard that HMRC might be considering only allowing membership of a QROPS in the country in which an individual is resident - we must wait and see for now. There has even been call for the establishment of an industry body to represent QROPS.
Whatever happens in the future, it is likely that European Union law will play a part. EU law aims to achieve 'the four freedoms', namely freedom of movement of goods, persons, services and capital. Interestingly, there is a line of case law where the European Court of Justice has considered pensions within this context (c.f. Danner, Skandia and most recently the Commission v Denmark in 2007).
It has even been suggested by one eminent pensions lawyer that the current five year 'non residence' qualification could be in breach of European law for being overly restrictive and that there could be a potential challenge on this basis.
The idea of having the freedom to move your pension around Europe causes real complications from a UK taxation perspective. Tax relief is given on pension contributions with a view that the tax will be recouped when benefits come into payment - this becomes almost impossible if benefits only come into payment in a different EU state and HMRC cannot get its tax.
As can be seen, specialist advice on QROPS is essential and it may be that a watching brief is the right position to take at the current time. As we know, the pension rules of the QROPS jurisdiction only come into effect after the five year period of non residence. This could mean that good advice could be to leave the pension money in the UK for someone who has already left with a view to transferring it nearer to the end of the five year period.
In many countries the pension and tax legislation is unlikely to be much more attractive than the UK, there may be wealth taxes etc - the fabled and generally quoted benefit of 100% cash is unlikely to be available. In such circumstances it might be better to leave the pension money in the UK. A useful option might be to use a SIPP and ask the SIPP manager if it is possible to designate the portfolio in, say Euros, to help avoid any currency risk.
As I write, I understand that there are currently proposals in Spain to abolish wealth tax and inheritance tax - could that mean Spain becomes a possible future QROPS destination and a tax efficient place to retire? Watch this space!
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