The case for QROPS

All you need to know about exporting pension savings.

QROPS schemes were established under regulation by UK HMRC in 2006 (A Day) to allow people leaving the UK to export their pension savings.

These schemes have become popular because of their simplicity and the increased investment flexibility they can provide. Two key benefits are often the removal of a requirement to buy an annuity contract (potentially expensive and restrictive) and the freedom from inheritance tax (so you can potentially pass on your entire remaining pension to dependents).

However, there has been mixed publicity for QROPS following HMRC’s removal of Singapore QROPS from their list of authorised schemes. In practice, this has meant that HMRC has tightened up on its rules to prevent schemes from promising pension-busting solutions. This has been seen as a positive move by many professional pension scheme providers in better-regulated locations.

Charges for rule breakers

If a scheme is deemed to have been breaking HMRC rules, then any transfer made to that scheme could give rise to an unauthorised payments charge liability for the pension member. This could be expensive and has caused much concern among people and professional advisers who have or are considering a QROPS, as the unauthorised payment charge can wipe out 55% of the pension. This may be what happens in Singapore, although cases are being contested and only time will tell.

These moves give strength to jurisdictions that have a quality relationship with HMRC and clear rules and expectations for pension providers. The intention of schemes must surely remain to provide a retirement income for life and to ensure that the spirit as well as law around scheme rules are adhered to.

There are many jurisdictions with approved QROPS schemes, many providing individuals with ability to import UK pensions to the jurisdiction in which they have become resident. But this is not suitable for all people moving away from the UK, perhaps because there is no recognition of pension schemes in the country they are moving to, because of language barriers or concern over the credibility of local providers. There are alternatives provided in well regulated, English-speaking environments with experienced and qualified staff that can provide a tax neutral solution. Guernsey is one of them.

Benefits of Guernsey

Guernsey is renowned around the globe as a mature, well established international finance centre and has been providing fiduciary services for over 40 years with provision of: trusts, corporate services and more recently QROPS schemes. Guernsey saw some of the very first QROPS pension schemes to be created and therefore has one of the longest histories dealing with QROPS transfers and QROPS rules and regulations

Guernsey has had a reciprocal agreement with HMRC for a number of years. Following a review, prompted by dialogue with Guernsey, HMRC introduced the QROPS rule that a pension must always use 70% of the fund to provide an income in retirement. As HMRC has looked more closely at QROPS arrangements Guernsey tax authorities have kept an open dialogue with HMRC and as a result have introduced requirements that pension schemes for non-residents are also open to local residents and that they must follow the same rules.

This means that a Guernsey QROPS member must:

• retain 75% of the fund value to provide a retirement income;
• not be able to draw benefits before age 50 (55 from 2010) and must commence drawing by 75,
• take a properly valued drawdown, but with no requirement to buy an annuity, and;
• adhere to the investment restrictions set out in Guernsey’s published notes on its retirement annuity trust schemes.

If funds are transferred away, that transfer must be either to a scheme that itself has QROPS approval or has conditions similar to those imposed by Guernsey’s domestic legislation.

How to set up a QROPS scheme

To become a recognised QROPS scheme, the provider must meet the requirements set out by HMRC. In Guernsey the scheme must first get local tax authority approval, which may entail conditions being imposed, and then seek formal confirmation that HMRC is happy with the scheme. An official QROPS certificate is then issued from HMRC. This may take several weeks.

Transfers can then be made to a QROPS from most UK pension schemes, including SIPP and SSAS arrangements, in cash or through in specie transfers of investments. These transfers are considered as a Benefit Crystallization Event so will be tested against an individual’s lifetime allowance.

A reporting requirement to HMRC remains for five years after the QROPS member has ceased to be resident in the UK. This requires that all payments to beneficiaries within that period are reported.

A Guernsey QROPS allows for a wide range of investments including cash, bonds, equities, investment funds, hedge funds, life insurance, structured products and even real estate – very similar to a UK SIPP, although Guernsey trustees will need to approve specific investment decisions.

Once members have been outside the UK for five years there is certain additional flexibility if local pension rules allow. A Guernsey scheme allows lump sums to be taken in tranche. This gives some additional flexibility when people are stepping down their work commitment rather than give up completely and retiring in one jump.

Guernsey tax legislation means that non-residents with a Guernsey QROPS do not have any tax deducted from pension payments. However, it should be noted that any recipient of a distribution from the QROPS may have to pay tax in their country of residence depending on their personal circumstances.

And finally, for non-Guernsey residents who have not purchased an annuity, on death any assets remaining in the pension scheme will be available to:

• provide a pension for a spouse or dependents, or;
• pay a lump sum to nominated beneficiaries, or;
• transfer to an approved pension scheme for the benefit of nominated beneficiaries, or;
• pay the remaining funds to the estate.

This offers a considerable degree of flexibility for Guernsey QROPS members to see future value from their lifetime pension savings.

So a QROPS is not for everybody. But for people who intend to leave the UK for good, a transfer of their pension to a properly run QROPS offers a good degree of additional flexibility. But beware less reputable jurisdictions and providers.

By Tim Parkes, director Carey Pensions and Benefits, Guernsey.