July 2008

Offshore innovation

What are the key features of these products?

The schemes are formed by an Isle of Man (IoM) personal pension master trust, under which there are individual arrangements for each member. The schemes are administered and designed by Boal & Co which is registered as a professional schemes administrator with the IPA - the pensions regulator in IoM, and already administers in excess of £200m of IoM pension schemes.

There are initially two schemes: one invests in pooled funds via insurance bonds (typically offshore bonds, which provide gross roll-up); the other invests in high interest bank accounts selected by the member IFA; a third scheme with additional investment options is already in the pipeline. All schemes are tax-approved personal pensions under IoM income tax legislation and are registered as QROPS by HMRC.

What issues are they intended to address?

The schemes are aimed at individuals who have built up UK pensions and then moved abroad, to work or retire. Before A-Day, pension transfers to non-UK schemes relied on reciprocal Inland Revenue agreements which generally meant that a UK pension could only transfer overseas if it was to a scheme in the person's new country of residence. However, post A-Day UK transfers can be made to any overseas pension scheme provided that overseas scheme is registered with HMRC as a Qualifying Overseas Recognised Pension Scheme (QROPS).

The key benefits of an IoM personal pension, compared to a UK personal pension, are:

- No need to buy an annuity - ever. There is instead a much more flexible drawdown environment, with individual actuarial calculation of drawdown in retirement.

- Ability to pass on remaining funds to family/estate on death, less only a 7.5% tax

- A 30% tax-free retirement lump sum is the maximum allowed for a QROPS scheme. This is in comparison to the UK's 25%.

- Possible tax savings when pensions come into payment

What kind of investment flexibility do the schemes offer?

There are two different levels of flexibility. Firstly there is our IoM SIPP which allows investors to invest in the following.

- Virtually unrestricted in relation to normal listed investments (shares, bonds etc) and pooled funds (OEICS, offshore funds, hedge funds etc - not the same restrictions as in UK)

- Insurance bonds, e.g. portfolio bonds and other single premium bonds

- Bank and building society accounts, including fixed-term deposits

- Commercial property

- Residential property (though not in respect of UK-transferred pension funds)

- Private company shares are another possibility

Our Balley Chashtal personal pension scheme is more restricted but still offers access to around 3,000 pooled funds which can be accessed via portfolio bonds and other single premium insurance bonds.

For the conservative investor, and also for the personal pension in drawdown, we also have a scheme which invests in high-interest bank accounts, with availability of preferential interest rates (£1m interest rates for as little as £15,000 investment)

Who are these schemes aimed at?

They are aimed at individuals who have in the past built up UK pensions but are no longer UK-resident such as British expatriates and non-doms (in the City and elsewhere) who have worked in UK in the past and accumulated UK pension funds.

They are also available to our local IoM market, including wealthy individuals who physically relocate from the UK though this is no longer a pre-requisite for an IoM transfer.

What benefits do they offer that other products don't?

First and foremost they take UK pensions out of the UK system of pension rules. This has a number of benefits including enabling pension funds to be passed down a generation - unlike the harsh regime in place in the UK, with only a 7.5% tax on eventual wind-up.

In addition to this the schemes have a variety of other benefits including allowing a higher 30% tax-free lump sum as well as a wider investment choice, including investments which are not permissible for even UK SIPPs.

What are the main challenges you have faced in developing these schemes?

We had already established nearly 20 QROPS schemes (SIPPs and SSASs) but what we needed to do for this project was to put together an off-the-shelf packaged solution for people who fall below what we see as being the natural SIPP threshold of around £250,000.

We invested significant effort in the trust deed and rules of the schemes, to enable them to become appropriate schemes for transfer-in of protected rights and also developed a fulfillment area on our web-site at www.boal.co.uk/qrops so that advisers can obtain information and establish a pathway for scheme literature and application forms

What kind of feedback have you had since launch?

We've had an excellent level of interest and very promising completed new business not only from UK and international IFAs but also from offshore life companies who see considerable new business potential through QROPS transfers. We've also seen a real pent-up demand for transfer of protected rights and currently very few QROPS schemes are able to accept these.

Why are these QROPS schemes not available to UK residents?

There is nothing to prevent us from taking transfers from UK residents into our QROPs schemes (including our SIPPs). However, HMRC rules and "member payment charges" continue to apply to QROPS schemes - the link is only broken after a five-year period of UK non-residence.

Hence, virtually none of the advantages discussed above can be obtained by UK-residents (who remain UK-resident).

Gary Boal
Managing Director
Boal & Co