What does HMRC's controversial new list of approved QROPS schemes mean for the overseas market?
Two weeks ago, HMRC took a decision that stunned anyone involved with Guernsey pensions. Following a review of the offshore market, HMRC struck off over 300 Guernsey schemes from their approved QROPS list, leaving only three in place. The former market leader, who took a third of all overseas pension transfers last year alone, can no longer look after UK expats' pensions.
This was a hard blow for a jurisdiction that prided itself on good practice and enjoyed strong ties with the revenue. Even worse, Guernsey Association of Pension Providers (GAPP) had lobbied local government to meet controversial new HMRC rules which said residents and non-residents should be treated the same for tax purposes.
Guernsey administrators thought the resulting introduction of a new pension regime called S157E, would be enough to keep QROPS status, clearly it wasn't.
Providers and practitioners on the island are scratching their heads as to why HMRC disqualified their schemes. In the draft consultation and subsequent published legislation, there is nothing to immediately suggest where Guernsey fell short.
As a result, it appears to many Guernsey administrators as if HMRC game-changed overnight and applied a new condition that was not put down in law. So what are the issues for Guernsey, the likely results for the rest of the market and what is HMRC trying to achieve?
Perhaps HMRC has decided only local residents can take pension benefits in Guernsey. It seems to Steven Ainsworth, president of GAPP: "A further requirement, where Guernsey is concerned, is you can only transfer into a Guernsey scheme if you are a Guernsey resident. If you're living in Dubai, you can no longer transfer into the jurisdiction of your choice; you can only transfer into the jurisdiction in which you are living."
Issues and contradictions
But the real worry could be, under SE157, there would be no Guernsey income tax due on benefits paid. Previously residents had paid income tax on benefits at 20%, non-residents were not taxed.
However, Ainsworth says this it is unlikely to make any difference. "If for example, you've retired to Spain, if you've left your pension in your UK scheme, double tax treaties would mean it would have been taxed in Spain, not the UK. On the other hand if you've transferred to Guernsey, it would still be taxed in Spain because you're registered there, the taxation in practice would be the same in those cases, so we're at a bit of a loss."
This feeling of confusion is shared by many QROPS specialists. David Higgins, director of technical sales and marketing at The Overseas Pension agrees: "We spoke to HMRC to get a feel for what they were trying to achieve and they wanted pensions to be used as pensions. We thought we were on the right lines. It makes you wonder if there's a sea shift in HMRC's thinking or a specific desire to do something that was unstated, to remove all third party jurisdictions."
But as Higgins also points out, other so -called third party jurisdictions, such as Jersey and the Isle of Man have stayed the distance. Meanwhile, New Zealand has retained over twenty schemes, despite predictions from QROP specialists, that it would disappear as a jurisdiction.
And in addition, other hubs may have remained unscathed by the QROPS shake-up due to the way they treat tax. Malta schemes are a good example, due to double taxation agreements.
Higgins explains: "[Malta] intend to tax the pension income at source. As an individual, you would then claim exemption under the double taxation agreements, assuming there is one with the country you're resident in, and Malta, in order you didn't suffer taxation twice. It's a more cumbersome process, whether that brings a level of comfort to HMRC, time will tell."
What is it about such tax deals that are so attractive? Mike Coady, director of the deVere Group says: "I think the double taxation agreements will come in useful for people not living in places like Dubai where they've got to pay some sort of tax in places like France or Spain, some sort of retired location."
Or perhaps the real issue is with QROPS themselves. Coady says: "HMRC isn't overtly keen on QROPS as a function, they take revenue away from the UK. If you think £1.3 or £1.5 billion has been transferred so far, if you take the UK government having the ability to tax that at somewhere between 20 and 45%, that would be around £400-600 million they've lost over the past few years."
So, removing the bulk of schemes from Guernsey could be a symbolic gesture and a sign of things to come. As Higgins says; "Guernsey was streaks ahead in terms of the volume of business it transacted, so perhaps HMRC [have said] that's our biggest concern, we'll start there, and then we'll deal with other concerns as they arise."
And Coady says HMRC could have shifted policy now as it did not expect Guernsey to pull off the redesign of its schemes, "hence why it's come back with another change."
However, a HMRC spokesman said: "No country or territory has been targeted by the overall changes to the QROPS regime." But speculation is rife as to where the revenue could shift its focus to in the future.
If HMRC begins a programme of clamping down on other centres similar to Guernsey, as many commentators expect; we could see the market change dramatically. "I think the focus from HMRC is to move into a more European model" says Coady. "It traditionally doesn't like the third country locations, part fuelled by places like New Zealand [which was notorious for early access schemes]."
We could see other EU jurisdictions, such as Gibraltar increasingly coming into the fold. Coady says "you've got good tax efficiency, good tax breaks, it's a bit like Malta in its regulatory status, it's English speaking, it's a destination people know and it's got pension rules that would be similar. And it's very easy for Gibraltar to have in place or create schemes very similar to UK schemes rules. "
Many expect Malta to be the top contender. Coady says "If you look at Malta and its regulation, it's very much EU, it's part of the commonwealth, on the Organisation for Economic Cooperation and Development's white list, it's a very clean regulatory status and its English speaking. I wouldn't be surprised in the future if the likes of the Concept Group and Sovereign - the trustees who have been in Guernsey will move into places like Malta, as the new Guernsey but with other benefits."
But there could be unintended consequences on the horizon. Higgins wonders whether a lot of overseas business will be forced underground as a result of the clampdown. He says: "When you've got a system that works [such as Guernsey], it's close to home, it's controllable. Perhaps that's more desirable than forcing it further afield where you have less control over what's going on."
A second big issue is the limiting of choice following the removal of Guernsey as a jurisdiction, which Ian Sweet, commercial director of Guardian Wealth Management, warns could be damaging for consumers. "Having different jurisdictions makes the market competitive, makes it priced competitively; you've got a number of choices when giving advice. From that point, it's a shame choice has been reduced." He cautions that falling standards and less attractive propositions could be a likely result of the changes.
Along the same lines, Ainsworth says that "people no longer have the flexibility they once had" to make choices about where to place their overseas pension.
After all, Guernsey became a big player, because expats based in more further flung destinations such as Singapore wanted their UK pensions looked after in a regulated English-speaking, offshore centre.
But Coady disagrees. He says: "In many respects I think it's remarkably positive. I think it adds another layer, another level of maturity to the marketplace."
Sweet says advisers have a real challenge on their hands: "Advisers have got to weigh up when they're discussing pension transfers with clients, whether a QROPS is the best option, because there's a lot of uncertainty around the product caused by the legislators."
He questions whether pension transfers will increasingly move to SIPPS. And perhaps this is what the revenue wants, if it is true that HMRC is not keen on overseas pension vehicles.
However, for the meantime, HMRC is staying silent. Ainsworth explains: "We still don't know what our position is, because HMRC haven't said. All it has said is we have cut a lot of schemes off the approved list. We don't know why and what kind of rules it is applying and we're obviously trying to find out."
The sooner HMRC clarifies its position the better, as providers and advisers based in Guernsey are stuck in limbo. In the meantime, I wonder how the other QROPS players will assemble, like pieces on a chess board, to vie for business. It will be interesting to watch out for what HMRC will do next and which country will come out on top as the leading jurisdiction for UK expat pensions.
Despite improved risk appetite
FOS award limit increase
Relates to 136 million transaction reports
Ceremony will take place 13 November