HM Revenue & Customs issued draft legislation on 6th December 2011 amending the rules applied to Qualifying Recognised Overseas Pension Schemes (QROPS). The new legislation, once
HM Revenue & Customs issued draft legislation on 6th December 2011 amending the rules applied to Qualifying Recognised Overseas Pension Schemes (QROPS). The new legislation, once approved, will come into effect on 6th April this year.
The aim of the legislation is to –
– Stop people taking 100% of their pension funds as a lump sum
– Stop people taking their pension fund without paying tax
The Statutory Instruments document ?Overseas Pension Schemes (Miscellaneous Amendments) Regulations 2012? states:
?QROPS were designed to allow those who are leaving the UK to take their pension savings with them to their new country of residence and provide an income in retirement there. It was intended to be a way of continuing pension saving rather than a method of converting existing pension saving into a lump sum or of escaping taxation on pension savings.?
To this end, the new legislation limits lump sums from QROPS to no more than 30%, so that 70% of the fund is left to provide an income in retirement. This amendment is targeted at New Zealand schemes which to date have allowed non-residents to withdraw their whole fund as cash.
A QROPS jurisdiction will have to give the same tax exemptions in respect of benefit payments made to members who are locally resident as to members who are non-residents. The reporting period to HMRC is extended to 10 years after transfer into QROPS (or five years after becoming non-UK resident if that is later).
HMRC says that the changes ?firm up the tests to be an overseas pension scheme to make the rules work as always originally intended?.
Many expatriates have already transferred into QROPS or are planning to do so. The question is whether QROPS are worthwhile going forward.
Unless you want to use QROPS to try and take more than 30% of your fund as cash, the answer is yes.
QROPS still give you the ability to invest in Euros and receive income in Euros, something advantageous to expatriates since it removes currency exchange risk and costs. You can choose and usually switch between currencies.
QROPS still provides the ability to escape the 55% UK charge applied on pension funds on death (also charged on non-residents). Once the reporting period is over your fund is no longer liable to this tax, and although it has been extended to 10 years, when you consider that average mortality is now 81 for males and 86 for females, for many people under 70 the 10 years should not be much of an issue.
In countries like Spain and France you still have the ability to get the advantageous annuity tax treatment for your pension income.
QROPS are protected from UK inheritance tax and the benefit of the fund can pass to your heirs.
With a QROPS, strategies can be put in place so that you are not necessarily restricted to the Government Actuary?s Department (GAD) rules for income drawdown after the reporting period. You can have a flexible investment plan across a wide range of funds with a risk profile that matches your attitude to risk.
All in all, for most people who use QROPS in the spirit they were intended, they are still as attractive as they previously were.
If QROPS jurisdictions start charging tax on the pension income to match what they do with local residents, you may be able to use a double tax treaty to claim the tax back or to have it paid gross. If you are tax resident in Spain, France, Portugal or Cyprus, for example, you should always have been declaring your QROPS income and paying tax on it in your country of residence.
When it comes to having to leave 70% of the fund to provide an income, this is something many QROPS jurisdictions already do anyway, in which case the change wouldn?t affect you.
The new legislation does not start until 6th April, so it is technically possible to take up to 100% of your fund as a lump sum. However I advise extreme caution because HMRC has made it clear it never intended for this to happen and there is a good possibility it will back date the legislation so that it applies from the date it was announced (6th December 2011). HMRC has done this already and only last year so we won?t be surprised if it does so again. This could mean that you have to pay a 55% unauthorised payment charge and possibly a further tax charge in your country of residence, or find yourself locked into a scheme which is not right for you.
For clarification of the new pension rules, and information on the different QROPS jurisdictions, speak to an advisory firm which is authorised and regulated by the UK Financial Services Authority for the conduct of investment and pension business, like Blevins Franks Financial Management Ltd.
By David Franks, Chief Executive, Blevins Franks
13th January 2012
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.