Proposed Changes to QROPS Legislation
There has been much comment and opinion regarding the “Spirit of what HMRC” intended or didn’t intend within the QROPS industry but whatever your view, we feel sure it was never intended to allow the member to get their hands on either the entire value or a very large percentage of it in one go. Indeed in HMRC’s explanatory memorandum to the proposed changes they state “QROPS are widely marketed as a means of turning pension savings into a tax-free lump sum which is contrary to the principles behind allowing tax-free transfer of pension savings”.
So whilst Guernsey as a jurisdiction has looked to operate within HMRC’s requirements, some within our industry have been waving the proverbial “red rag to the bull” by allowing varying degrees of pension busting. Now we will all need to adapt to whatever these proposals finally look like in April of next year and how that will affect our clients.
The changes being proposed by HMRC are contained within draft set of amending regulations: the Overseas Pension Schemes (Miscellaneous Amendments) Regulations 2012 (‘the Regulations’).
The main changes made by the Regulations are:
to impose substantial additional reporting and notification requirements, in particular an extension of the period in which a QROPS must report benefit payments to HMRC to the later of:
- the expiry of five tax years after the tax year in which the member ceases to be UK resident (current requirement); and
- ten years after the transfer payment to the QROPS is made (new requirement);
- a new requirement for a prospective QROPS member to give a written acknowledgement to their UK pension scheme administrator (to be forwarded to HMRC) that the transfer payment overseas will be subject to unauthorised payment tax charges if the receiving scheme is not a QROPS;
- to require a QROPS jurisdiction 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;
- to require a QROPS always to be recognised by the local tax authorities as a pension scheme;
- to limit the scope for transfers to New Zealand pension schemes: the rules of a New Zealand scheme (other than a KiwiSaver Scheme) will have to impose various restrictions on the benefits that can be paid.
Whilst most of the above changes would add to the administration of a QROPS scheme, their intention is to prevent the misuse of QROPS and in particular pension busting and so are broadly positive for the industry. However, the new requirement in (c) above potentially prejudices the position of members not resident in the jurisdiction in which their QROPS is established (which is the case for most QROPS). In future, a QROPS jurisdiction may have to impose a withholding tax on benefit payments to non-resident members, where benefit payments to resident members would be taxed.
It is intended that the Regulations (once finalised) will come into force with effect from 6 April 2012. The government will consult on the draft Regulations until 31 January 2012. It would appear that individuals who have already transferred UK pension funds to QROPS should still be able to take benefits free of any local withholding tax but will fall under the new ten year reporting requirement. At present there are no anti-forestalling measures to prevent individuals avoiding the new restrictions by transferring their UK pension funds abroad between 6 December 2011 and 6 April 2012.
Also of significance is the content of HMRC’s announcement (contained in a Statement, Tax Information and Impact Note and draft Explanatory Memorandum) accompanying the draft Regulations. HMRC has stated that it expects that:
- a QROPS should be broadly similar to a UK registered pension scheme;
- a QROPS member should be in broadly the same position as someone who keeps their pension savings in the UK; and
- QROPS are only for individuals leaving or intending permanently to leave the UK.
There does not appear to be any intention (at least as yet) to introduce new legislation on this basis. This may suggest that HMRC consider the above requirements already effectively apply.
HMRC states that it is concerned about “pension busting” in particular, overseas schemes that pay out 100% lump sums to members. This is no surprise, as HMRC’s delisting of Singapore QROPS back in 2008 was apparently motivated by this concern.
While we are in the early stages of the consultation period it is difficult to predict the final outcome of the above with any certainty. We appreciate that for Financial Advisers there will be genuine concern that giving advice in this area of financial planning is going to be extremely difficult when we don’t yet know what the ramifications of these changes will be. We are therefore looking to provide clarification as soon as possible and the Guernsey Association of Pension Providers (GAPP), of which we are a member, are liaising with both The Guernsey Tax Office and HMRC to ensure the last 5 years of setting the standards in offshore pension administration and Trusteeship will continue.