Yellow Brick Road or Highway to a Tax Inferno?

How do advisers stay on the right track to ensure their expatriate clients get the best possible retirement pot from a QROPS?

If ever there was a yellow brick road to financial retirement bliss, surely QROPS lays the trail? Here is the legal way for your clients to take their wealth to any sun-kissed corner of the world with the full blessing and largesse of HMRC. Once another jurisdiction’s pension legislation has earned the QROPS label, then, like the Biblical tale of the miracle of the widow’s cruse, the scheme just keeps pouring out the tax free savings within... or so IFAs have been led to believe.

Now to a certain extent this rosy horizon is still within grasp. But recent developments which include a blacklist of QROPS jurisdictions and clients being fined as much as 50% of their retirement wealth for participating in a denounced scheme, have meant a gathering of storm clouds. The dearth of explanation on these recent draconian responses leaves IFAs without any real sense of the legal parameters of a QROPS arrangement in a number of once-deemed abiding jurisdictions. Such exposure means running the risk of moving a client’s retirement wealth into a scheme which may, sometime down the line, be declared unlawful, become an irreversible action, or create a tax black hole.

Despite the unsettling events, the basic premise of QROPS hasn’t change. Qualifying Recognised Overseas Pension Schemes sit outside of the UK and can legally take a transfer from a UK pension. Who qualifies for such a scheme? Anyone who is non-resident in the UK but has pension assets in the UK, or anyone in the UK that is shortly to become non-resident. So far, so good. But what complicates the QROPS’ market offering is the fact that they are multi-jurisdictional whilst at the same time remain governed by the UK’s HMRC as Geraint Davies, Managing Director of Montfort International, explains. “The basic principle is a scheme which has two sets of rules. These are UK rules which the scheme must abide by and the local rules. The UK rules are dominant and the local rules are in the background. You get to those local rules once you've been outside the UK for five complete tax years.”

QROPS product provider Michael Lightfoot, who moved from being an Isle of Man pension legislator to join Close/Kleinwort Benson in Guernsey, says that from a provider’s perspective, the system of working within the UK’s regulatory guidelines seems to operate by complying with the QROPS’ requirements until HMRC proves you don't comply. “Being product providers there's an awful lot of governance around the way in which we operate in making sure we have domestic rules in Guernsey, and we have the rules in QROPS.” What matters is the interactivity between both sets of rules. Basically, providers are running a scheme based in a particular jurisdiction with its own rules that relate to pensions but which will be overridden if something is done that HMRC doesn't like or something is done, such as the creation of an unauthorised payment, in which case the provider will be told by HMRC they’ve transgressed the agreement on running a scheme in a certain way.

Mr Lightfoot says it’s transgressions such as these that has caused the current problems with schemes in Hong Kong and Singapore. “They signed declarations and they confirmed they were operating in a certain way, (but) in reality they were operating in a completely different way. As the market moves forward over the next three to five years we're going to see an awful lot more schemes found out in the same way with HMRC looking at a piece of paper in their office that says it's doing one thing and it's actually doing another.”

It is the huge tax benefits that make QROPS a product no adviser with expatriate clients can just walk away from. Where else can you find the means that allow your qualifying clients to wrap up all their pension savings pots into the one offshore scheme, allowing the transfer of funds outside of the UK tax-free? Where else can you find such a scheme that on death is not subject to UK inheritance tax but which permits the full pot to be passed onto the beneficiaries of your client’s choice? Jeff Bowman, Managing Director of Bowman and Associates, makes the point that if the client transfers into a local pension fund in a jurisdiction that does not tax pensions - such as Australia - then it’s a win-win situation. No tax on the building up of the savings pot, nor on the transfer out, and the client ends up with a tax-free income stream.

Geraint Davies warns advisers about the layers of complexity when recommending QROPS jurisdictions. “The overseas scheme has got to behave like a UK scheme for life, it has go to do as the UK scheme does. This is a whole new era where tax, visas, residency status have all got to be factored in - this is top of the range advice and we're seeing some people in the market place thinking it’s a quick fix to move some funds overseas. But it’s technically hugely complicated.”

There are 45 qualifying jurisdictions approved by HMRC in terms of offering both qualifying and recognised schemes. The full list can be found at http://www.hmrc.gov.uk/pensionschemes/qrops.pdf

New Zealand has attracted a lot of nervous glances recently and many fear that its QROPS’ offering could end up being investigated by HMRC. Geraint Davies describes the way some New Zealand QROPS have been sold as “Smash and grab. We're seeing people in Spain saying ‘I can move your pension and wash it through southern New Zealand schemes’. Stories abound of so-called QROPS being ‘washed in’ to New Zealand on a Friday and ‘washed out’ again on the  Monday. Such a laundry service means the scheme’s cash has been taken out of the UK on trust but as soon as it’s reached another jurisdiction’s shores it’s been disbanded and the tax-free cash handed to the client minus a hefty commission pocketed by the adviser.

So where are the safe jurisdictions offering a domicile that won’t cock a snoop at HMRC nor risk a client’s life-time savings? Michael Lightfoot says Guernsey is a tried and tested jurisdiction. “It has a first mover advantage - it was there from day one, it's actually proactively engaged with HMRC, brought in voluntary codes of practice, all sorts of things are going on, and again it's ensuring it has ongoing compliance with the core requirements of QROPS.”

Looking elsewhere in Europe, he recommends Malta as being a jurisdiction in the QROPS market for the long haul and for similar reasons as Guernsey. “ It benefits from a lot of double taxation treaties, it's within Europe, it's got a fairly new pension system which has a fairly robust look and feel about it. And as one of the last QROPS centres into the market, Malta has probably learned from a lot of the accidents that have happened in other jurisdictions.”