May 2008

Cream of the QROPS

A subject that seems to come up at nearly every meeting I go to is QROPS (Qualifying Recognised Overseas Pension Schemes). There has always been the facility to transfer UK pension benefits overseas but before 2006 this was quite a complex issue requiring individual consideration for each scheme and often a translation of the receiving scheme's rules.

Since April 2006 the only recognised transfers to overseas schemes are transfers from UK registered pension schemes to QROPS. Any other overseas transfer will be a non-recognised transfer and could be treated as an unauthorised payment. In such circumstances there could be the following taxes to pay:

The individual will have an unauthorised member payment tax charge of 40% of the transfer value;

The scheme will have a scheme sanction tax charge of 15% of the transfer value;

If the transfer value, together with any other unauthorised member payments for the individual in a 12 month period, is more than 25% of the individual's fund value the individual will have a further unauthorised payment tax surcharge of 15% of the transfer value.

There is also the possibility that if more than 25% of the scheme funds are paid as non-recognised transfers the scheme could be de-registered and this could mean a further de-registration tax charge for the scheme of 40% of its total assets.

Analysing QROPS

As it says on the label, a QROPS is a Recognised Overseas Pension Scheme that is 'qualifying.' Let's look at the component parts.

A 'Recognised Overseas Pension Scheme' is a pension scheme set up and regulated/recognised for tax purposes. There are a number of regulation conditions that a scheme must meet and a number of tax recognition conditions.

The scheme must either be a personal pension or an occupational pension scheme that is regulated in the country in which it is established. Alternatively, it can be established in the EEA as long as the pension scheme rules provide that at least 70% of a member's tax relieved funds will be designated by the scheme manager to provide an income for life, and that benefits must be payable no earlier than the normal minimum pension age.

From a tax perspective, the scheme must be open to residents of the country in which the scheme is established, at least 70% of the funds must be used to provide a pension income on retirement, retirement cannot be before the normal minimum pension age and particular rules on tax relief must be met.

A Qualifying Recognised Overseas Pension Scheme is a Recognised Overseas Pension Scheme where the scheme manager has:

Notified HMRC that the scheme is a qualifying recognised overseas pension scheme;

Supplied HMRC with any evidence required to prove this;

Told HMRC the name of the country where the scheme is set up;

Agreed to tell HMRC if the scheme stops being a recognised overseas pension scheme;

Agreed to tell HMRC about certain payments from the scheme.

Any recognised transfer to a qualifying recognised overseas pension scheme must always be reported to HMRC by the UK scheme administrator.

It is also important to note that a recognised transfer from a UK registered pension scheme to a QROPS is a benefit crystallisation event (BCE). This means that the amount transferred will be tested against, and will use up, some of the individual's lifetime tax allowance (LTA).

Reporting

The scheme manager of the QROPS must agree to tell HMRC when they pay benefits from the transferred fund or make a further pension transfer from it. The individual will be subject to the usual unauthorised payment tax charges if the overseas pension scheme makes any payments from the transferred fund that would not have been authorised payments under a UK registered pension scheme.

Perhaps the key issue with QROPS is that the reporting duty back to HMRC ends after the scheme member has been out of the country for at least five years. The QROPS scheme manager does not have to notify HMRC of payments if the QROPS scheme member is not resident in the UK when the benefit payment is made and has not been resident in the UK earlier in the tax year or in any of the five preceding tax years.

At this point the benefits become specifically subject to the rules of the QROPS and more particularly to the pension legislation in the jurisdiction concerned.

Obviously there could be advantages to this if the rules are perceived to be less strict than the corresponding rules in the UK, perhaps the benefit payment rules or even the level of tax payable in the new jurisdiction.

This is a very complex legal and technical subject and limited space means that I have only been able to give a brief overview. It is important that specialist advice is considered in every case.

There appear to be two reasons why QROPS are becoming so popular:

1. The increasing number of people who are going to live and retire abroad. This includes UK residents who are moving away from the UK but also non-UK residents who are working in the UK.

2. The possibility of using QROPS to avoid specific taxes in the UK, most particularly the tax charge levied on unauthorised payments paid post age 75 (the ubiquitous 82%).

For internationally mobile employees who intend to retire to another country and become subject to the prevailing tax regime, QROPS can offer a flexible option. As a method of trying to avoid a specific tax charge this might not be so successful.

Some jurisdictions have an employment test to allow membership of a QROPS, others might have a residence test. These should be no problem if the employment/residence is bona fide but it is important to realise that if not then it could be open to challenge by the tax authorities.

Similarly, caution regarding tax is important. Consideration must be given to the tax regime in the jurisdiction of the pension scheme and the tax regime in the jurisdiction in which the benefits will be received. In such considerations, the existence of a Double Taxation Treaty and the concepts of 'residence' and 'domicile' are likely to be important when it comes to tax liability, particularly on death.

Mike Morrison
Pension Strategy Manager
Winterthur Life