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Graham Macdonald, MBE MBMG International Ltd.
Nominated for the Lorenzo Natali Prize

 

Pensions update - The new and shrinking landscape of QROPS, part 2

Pension income (income drawdown) levels

Since my last update there has been several new QROPS Trusts launched in the market place, as well as several generic developments within the world of pensions, courtesy of HMRC, that will have an impact on QROPS going forward.
Therefore, I will break this Update down into subsections to enable you to read what you believe is pertinent to you.
To start with, in the Autumn Statement, the UK Chancellor bowed to public pressure with the reinstatement of the 120% rate with regards to maximum GAD rates when calculating income drawdown, up from the 100% it had been reduced to previously.
However, the HMRC guidelines on income drawdown from QROPS has always been ambiguous, merely stating that the income should not exceed “published annuity rates”. Most of the industry has always taken this to mean the aforementioned GAD (Government Actuaries Department) rates, not wishing to ruffle HMRC’s feathers.
However, at least 1 scheme in New Zealand is offering far higher drawdown rates than this, as does the Isle of Man, albeit taxed at 20% under Manx law, making the IOM jurisdiction unattractive to most expatriates. Therefore at my request Brooklands Pensions, who have a very reasonable NZ QROPS offering, are taking this matter up with HMRC and we hope to have clarification on this shortly.

Potential taxation of pension funds on transfer

The Autumn Statement also revealed that the Lifetime Allowance would be reduced to 1.25 million from April 2014. Although the chancellor said in his statement that only 2% of pensioners currently have a retirement fund above 1.25m, many clients may now have to take serious note of this reduction from the current Lifetime Allowance level of 1.5m.
For example, a pension scheme member aged 40 today, with a fund valued at 600k, only requires net growth of 5% per annum in their fund to find them self with a pension fund of 1.25m by age 55.
Transfer into a QROPS is a benefit crystallisation event (BCE8) and so long as the value of the transfer is below the LTA at that time, there will be no LTA charge levied on the fund. If the transfer is above the LTA, the excess is taxed at 25%, however.

Potential taxation of pension income and use of the Nil Rate Band

Remember that a UK pension is UK source income and therefore you have the Nil Rate Band allowance before you start to pay tax. Most expatriates with a UK pension fund will also qualify for a UK State Pension; this will use up a fair chunk of the Nil Rate Band and also the State Pension cannot be transferred to a QROPS.
However, for expatriates who do not have a UK state pension and their UK Company/Personal pension fund is relatively small, there may be few advantages and a few disadvantages in transferring to a QROPS, especially if they have no dependents to leave the residual value to on death.
In such instances it may be better to leave it where it is or transfer to a Small Self Invested Pension Scheme (SSIP). As always, each case should be looked at separately.
As stated, however, most holders of UK pensions will also have a State Pension due at retirement age. You will require 30 qualifying years (30 years where National Insurance contributions have been paid) to achieve a full basic State Pension. You can make up for a shortfall in your contributions, however, by paying voluntary Class 3 National Insurance Contributions. For example, I only have 21 qualifying years, a shortfall of 9 years, that I intend to start addressing 9 years before my State retirement age of 66.
When I enquired about my State Pension 18 months ago you could also go back 6 years to make up unpaid contributions, clearly, every expatriates situation will be different. Therefore to obtain a State Pension Forecast you should contact https://www.gov.uk/future-pension-centre, telephone +44 (0)191 218 3600 from overseas, with your national Insurance number to hand and you will find them very helpful.

UK draft finance bill

This year the Overview of Legislation in Draft, as the Draft Finance Bill is formally known, appears to do little more than add a few new reporting requirements to QROPS, including an obligation for all QROP scheme administrators to notify HMRC that their scheme continues to meet the conditions to be a QROPS.

Jurisdictional pros and cons

With different jurisdictions now having different methods of taxing pensions and therefore QROPS payments from these jurisdictions, clearly care must be taken in where a UK pension is transferred to; the chosen retirement destination of the individual having a big influence on this. This has come about as a result of last April’s legislation, in particular what became known as “Condition 4”, which stated that members of QROP schemes would not be permitted to enjoy a different tax treatment on their pension payments than that available to pensioners resident in the country in which the scheme was domiciled.
Therefore, here is a brief summary of each of the currently available preferred jurisdictions for people retiring in South East Asia.

Gibraltar

After 3 years of negotiations with HMRC, Gibraltar has emerged as a front runner with a nominal 2.5% local income tax rate on QROPS income, placating the UK taxman and also removing the requirement for Double Taxation Treaties (DTT) with other countries. Being a fully EU compliant jurisdiction it is regulated by the Gibraltar Association of Pension Fund Administrators (GAPFA), who released their own QROPS Code of Conduct in October 2012, a sensible level of compliance making this a very attractive jurisdiction.

Gibraltar “Lite” schemes

There are also now 2 low cost options for the transfer of pension funds under 100,000 GBP in value, with the castle Trust Groups offering of incredibly low fees of just 299 per annum being the front runner on price. The Sovereign QROPS “Lite” Trust charges 500 per annum but also offers free transfers to their Malta QROPS. However, at time of writing the Malta DTT with Thailand is still being negotiated.

Malta

The Malta Financial Services Authority (MFSA) is a heavily regulated and therefore slow moving regulatory body with a lot of DTT’s in place. At time of writing the first test cases are going through the MFSA to establish what they require under their “proof of residency” requirements for paying out pension income gross. Malta reserves the right to withhold up to 35% income tax on pension payments to other jurisdictions if their proof of residency requirements are not met.

New Zealand

A long established QROPS provider, New Zealand has the potential to offer a higher level of income (see pension income above) but investment fund choice is limited in this jurisdiction. There is a very attractive zero percent income tax stopped at source; however, regardless of DTT’s, that are contained in the second attachment along with their Tax Information Exchange Agreements.

Isle of Man

Not suitable for anyone wishing to draw an income from their QROPS due to a 20% tax rate.

Guernsey

Closed to new expatriate business from April 2012.

Mauritius

After new pension legislation was introduced by the Mauritius Financial Services Commission last month, I am liaising with Pension Administrators here who believe they will have a QROPS offering similar to Gibraltar in the first quarter of 2013. A dark horse but do not hold your breath waiting for the QROPS approval…


Pensions update - The new and shrinking landscape of QROPS, part 1

Recent legislation changes
A while ago, MBMG penned an article for on Qualifying Recognised Overseas Pension Schemes (QROPS). Back then we warned that the Chancellor, Alistair Darling, would not be happy with the income tax revenue that he was losing via the transfer of pensions away from Her Majesty’s Revenue and Customs (HMRC) jurisdiction and that if the mis-selling continues, this could give the government an excuse to close this potentially lucrative vehicle that expatriates may benefit from.
Needless to say the mis-selling of QROPS carried on unabated, mainly via New Zealand, where the schemes allowed people to take 100% of the value of their pensions out from day one. As the principle behind QROPS is that the Trustees enter into a spirit of cooperation with HMRC to provide an income for life for the pensioner, clearly HMRC were very unhappy with this state of affairs. Subsequently new draft legislation was announced in December 2011 that outlawed this practice from April 2012, leaving anyone who had taken this option looking over their shoulder in fear of a large tax bill from HMRC.
As well as stopping “pension busting”, the encashment of 100% of the funds, the stricter legislation also effectively closed many third party jurisdictions to new business. The most high profile casualty of this new legislation is Guernsey, despite the islands attempt to realign its pension legislation to fit within HMRC’s new rules. HMRC quoted a vague but all encompassing statement within the new legislation to shut the door on over 300 Guernsey QROP schemes. Guernsey is considering its options in fighting back; however, history has taught us that battles against HMRC are rarely won.
The legislation stated that pension schemes in “countries or territories will be excluded from being a QROPS” where this jurisdiction “makes legislation or otherwise creates or uses a pension scheme to provide tax advantages that are not intended to be available under the QROPS rules”. HMRC have deemed that the formation by the States of Guernsey of their new 157E pensions to fit within the new rules actually contravened this legislation, however.
This lead to the States of Guernsey Treasury Minister, Charles Parkinson stating, “It is now clear that the UK want to scrap the idea of third party jurisdiction QROPS altogether.” “Third Party Jurisdiction” is referring to Guernsey, Malta or New Zealand as the third party, where the first party is the UK and the second party is your selected retirement jurisdiction, like Thailand for example.
With the UK Chancellor George Osborne increasing the pressure on HMRC’s Chief Executive, Lin Homer in “tackling tax avoidance and evasion” to raise more revenue, it is clear that HMRC will tighten the screw wherever they can to try and dig the UK out of its fiscal deficit.
It is also worth remembering that back in August 2010 The Department for Work and Pensions issued a consultation paper proposing a ban on contracted-out defined benefit schemes (also known as final salary schemes, where your pension income is based on number of years of service and your salary at retirement), transferring to defined contribution schemes (where your pension will depend on the contributions that you have made and the subsequent investment performance of your pension fund) from April 2012. This was met with a vast amount of resistance from the pensions industry and was not enacted; it would have stopped many expatriates transferring to QROPS, however.
HMRC let the QROPS genie out of the bottle in April 2006, probably not realising how big the QROPS market place could become. So far GBP 1.8 billon has been transferred to QROPS; however, it is estimated that the potential total value of the QROPS market is GBP 650 billion. Now more than 5 million Brits live abroad with nearly 1,000 people more leaving the UK every day.
Obviously the income tax revenue that is being lost to HMRC is substantial and could increase exponentially. With the debt that the UK already has, it needs as much tax revenue as possible. Therefore, how long the remaining third party jurisdictions stay open for new business remains to be seen.
Why we currently have QROPS
So if the government is slowly squeezing the life blood out of QROPS, you may wonder why HMRC set them up in the first place. This was due to the Maastricht Treaty and the subsequent federal directive, allowing the “Freedom of Movement of Capital”.
It took over 12 years after the Maastricht Treaty was ratified in Nov 1993, but when the UK Government 2004 Finance Act came into law on 6th April 2006, QROPS were born.
The Maastricht Treaty formalized the European Union, and with it the “four freedoms” which form the underlying principles of the Union. These are the freedom of movement of people, goods, services and - significantly for expat pensioners - the freedom of movement of capital.
We have QROPS due to an EU directive, not due to any generosity on behalf of HMRC. Why would HMRC close down all the Guernsey QROPS, knowing that this will only mean that this business is placed via Malta or New Zealand? Quite simply, because HMRC will be looking for any tenuous reason to close these other jurisdictions, provided that they are not contravening the EU “Freedom of Movement of Capital” directive, in their quest to increase tax revenue.
Why you should
act now
Anyone who believes that third party jurisdiction QROPS will be around forever has no grasp of the fiscal deficit that the UK is in and is being quite naive.
I understand the argument that you could move your pension to a Self Invested Personal Pension (SIPP) now and on to a QROPS later, to save on Trustees fees. However, if the door slams shut on third party jurisdictions you will be left paying a lot more in UK tax for ever more, with no intention of ever returning to live there.
Nobody foresaw the recent legislation and the very sudden demise of Guernsey QROPS. You may rest assured that when the time comes for New Zealand and Malta, things will happen very quickly again. The last thing HMRC wants is to give everyone 6 months notice so they can comfortably move their pension funds to a QROPS and deny HMRC the revenue.
QROPS are not for everyone, however, and it is important that you receive good unbiased advice in this area. You should ask for a transfer analysis that, in the case of transferring final salary schemes will give you a critical yield analysis both before and after retirement to see if the numbers add up.
However, with the yields on 10 year UK Government bonds dropping to 1.81% at the time of writing, the lowest level since the Bank of England started keeping records in 1703, current transfer values on final salary schemes are at an all time high. Procrastination could prove very expensive indeed.
Since my last update there has been several new QROPS Trusts launched in the market place, as well as several generic developments within the world of pensions, courtesy of HMRC, that will have an impact on QROPS going forward.
Therefore, next week, I will break this Update down into subsections to enable you to read what you believe is pertinent to you.
To be continued…

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]

 


 
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Pensions update - The new and shrinking landscape of QROPS, part 2

Pensions update - The new and shrinking landscape of QROPS, part 1