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
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
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
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
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.
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
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.
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
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
Isle of Man
Not suitable for anyone wishing to draw an
income from their QROPS due to a 20% tax rate.
Closed to new expatriate business from April
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
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
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
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
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
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]