On 6 April, QROPS will get a huge revamp. Fiona Murphy explains how the reforms will shape the market and what advisers should be doing in the meantime.
Overseas pensions have been plagued by a poor image for some time now, so HMRC has decided to turn its gaze across the water. On April 6th 2012, dubbed Q-Day, legislation will come in to improve rules around reporting, taxation and to ensure people are using their QROPS as an income for retirement, not raiding funds early.
The main changes of the draft legislation can be summarised as follows:
• The reporting period to HMRC on events will be extended to 10 years of non-residency after the member transfers into QROPS (previously this was five years.)
• Payments by QROPS to be reported to HMRC within 60 days (this used to be a year.)
• No more than 30% of a QROPS to be taken as a lump sum.
• Reporting duties to continue for any scheme that ceases to be a QROPS
• Jurisdictions must apply the same tax exemption on pensions to residents and non-residents
These reforms are set to introduce a streamlined code of good practice across the jurisdictions, but what will they mean to advisers and what could the market look like, once these have been implemented?
While advisers keen to work in a new paradigm have welcomed the changes, others feel concerned by certain aspects. One of the new strands of legislation, Condition Four, which aims to treat residents and non-residents equally for pension tax purposes, has meant many QROPS centres will have to change their tax laws or surrender QROPS status.
Mike Lightfoot; retirement plans and portfolio trust director at Kleinwort Benson says: "The overriding issue is condition four and it's obvious many QROPS centres cannot comply if this goes ahead as proposed. Therefore advisers really should be finding out what the ‘worst case' and ‘best case' scenarios are likely to be and how much effort individual jurisdictions are putting in to ensuring that they are capable of complying come 6th April 2012."
However, David Higgins, director of technical sales and marketing at the Overseas Pension says advisers should not be put off: "If you get communication right, I don't think there are many challenges as much as potential opportunities [for] business planning."
The consultation period has only recently ended and legislation is still draft, meaning QROPS specialists feel their hands are tied in terms of going through the options with advisers as changes may still occur.
According to Lightfoot, the key for advisers is "giving consistent advice and not taking knee-jerk reactions. Advising someone to go into a scheme now when there is a lack of clarity on what may happen is fraught with issues and some clients may feel more comfortable making an informed decision once more information is available."
But even for the adviser taking steps in the face of uncertainty, other ripples may affect their working methods.
Higgins says: "if [an adviser] was playing with a fairly straight bat before, they'll probably be fine post Q-Day. I guess the only issue is there's going to be a lag. If you are writing business today, by April you don't want to be caught in limbo. If the jurisdiction or the provider you're dealing with isn't geared up to the changes, you don't want to get to the point with the client where you say, we've got to put you on hold."
This is real food for thought for advisers - to start a communication exercise with providers and jurisdictions now, to ensure they will still being doing business post Q-Day. After all, advisers do not want to get half way through a pension transfer and then have to start the process over again.
Despite such challenges, providers are taking a proactive stance in their relationships. Roger Berry managing director of Concept Group says: "Advisers will start to see correspondence coming out from providers. This morning the heads of our teams were in a meeting explaining what procedure [to take to] advise the IFAs on what's happening, then a week after that we'd write to the clients letting them know."
"[We'll say to the members] if you're quite happy being in a QROPS, that's remaining a QROPS and wants to be a QROPS, then you need do nothing. Probably around the end of March, we will vary our QROPS deed in line with the new QROPS compliant Guernsey pension legislation, so they won't need to do anything. It will be pretty seamless for most members and advisers. As providers begin to make tracks, advisers will have a clearer picture of what measures to take."
Eye on other countries
So what are the changes likely to bring? As a result of the potential legislation, old ways of working will become unsustainable in many quarters. Even Guernsey, a jurisdiction known for tackling QROPS abuse, has to change in line with Condition Four.
Tim Bush, director of Carey Group explains: "Guernsey Association of Pension Providers has been working in consultation with the Guernsey income tax authorities. A new draft law is being taken to the states of Guernsey and was debated on 7th of March. We're very confident this will be passed and we're very confident as a result of that change to the law, Guernsey will continue to be compliant with the requirements to run QROPS moving forward."
But other jurisdictions might not take the same route as Guernsey. HMRC's decision to remove approval for schemes that would allow retirees to siphon away 100% of their fund, will radically reform the sector. This practice was particularly popular in New Zealand - schemes within this jurisdiction held 28% of market share in 2011.
However, further changes which say only New Zealand residents can use a New Zealand QROPS has effectively closed off this jurisdiction. Such changes present a golden opportunity for other jurisdictions looking to snap up business.
Axa Wealth's head of technical sales Andy Zanelli says: "Other jurisdictions might choose to come into the market. At the moment, Malta is taking very little QROPS business, but it could be argued it's a good jurisdiction to look at, it is within the EU.
"Jersey is another waiting in the wings jurisdiction; they could draft some legislation allowing them to offer QROPS. As New Zealand disappears as an opportunity, others might say, I think there's a market here, it's been clarified as to what the revenue want, we could step in and offer something."
But will different contenders to step into the market? Higgins says: "We've been speaking to a lot of the insurance companies and big banks. They see the need for [QROPS]; they've got the client base which fits it, but they've always been a little bit hesitant about making sure they're not getting into something which is potentially regressive towards HMRC. [However] the changes with the clampdown in New Zealand so there won't be 100% lump sums being paid out and the 10 year reporting and the amount of information HMRC will be getting, will present some opportunities for new players to get into the market."
Berry believes that big players will not be interested in pension business, instead: "They're interested in maintaining or generating new assets under management."
But other commentators believe it will be difficult for big players to compete in this space. Zanelli says: "When you think about what you need to understand- pensions legislation in your community and country, the country of the domicile of the scheme, where the client lives and where they intend to retire, that's four different regimes you have to understand. This is why I think the market is dominated by specialist advisers."
Berry is well-placed to speak on the subject as Concept Group have a strong partnership with Skandia: "We've had long discussions with big institutions since 2007 to whether they want to do QROPS or not. But they rarely get totally comfortable with it, due to a variety of highly publicised abuses. They may put their toe in the water but I don't think they could compete due to their overheads, procedures and large institutions' compliance. I don't think they can make any money out of the pension side given existing low market fee levels. They have huge resources and huge client bases so there is potential."
In addition, there could be room for further partnerships between institutions and specialists to flourish.
Simplicity as standard
Overall, the changes will make it easier for financial advisers to engage with QROPS. The old regime, with different jurisdictions subject to different rules, often made the market feel confusing and therefore off-putting, to those green to the industry.
Higgins says: "If you've got a bit more uniformity when it comes to the underlying legislation for each jurisdiction, from an adviser's point of view, it takes you back to the fundamentals of looking at the underlying product and the financial strength and the investment flexibility, which might make it slightly easier."
Zanelli's top tip to any adviser looking to learn more about QROPs is: "If you're thinking of transacting in the QROPS market, come to understand it at a generic level by looking at the revenue website and speaking to people but then make sure you're dealing with specialist providers. Most of [them] have a link into the revenue departments of the jurisdiction they're based in."
At the moment, we don't know what will come out of the wood-work when the final legislation is passed - but it is unlikely to shift too radically from what we know now. In the meantime, advisers and providers have to ensure they are well placed to deal with the changes as they come and clients are briefed about what the future will hold for their overseas pension. The clock is ticking.
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