How will annuity reform affect QROPS?

Proposed annuity reform will have a big impact on how people take their retirement income. Ken Wrench looks at the possible impact on the QROPS market.

Now that the Government has laid out its proposals for annuity reform we are beginning to see a clearer picture of what the future may hold for retirees. Years of industry lobbying against overly restrictive pension rules appear to be forcing a rethink.

One argument for change is that inflexibility not only discourages pension saving, but it incentivises those who have built up funds to move them elsewhere to gain more freedom over investing or taking benefits.

QROPS – qualifying recognised overseas pension schemes – have been in the spotlight as a way for wealthy ex-pats to escape the shackles of the UK rules. There is a belief that they are mainly for the rich – particularly as they approach 75 – who want to pass on their pension funds on death without paying an 82% tax charge.

Future of QROPS

Now that the Government aims to lower the ‘recovery charge’ on unused funds to 55%, where does that leave the QROPS market? We believe it remains in robust good health. The 55% represents a tax grab of more than half the fund which, although better than 82%, may not apply in many other jurisdictions. More importantly, the tax charge is just one of a host of reasons for people to ditch their UK pensions for overseas.

Some estimates suggest as many as one in ten of those born in the UK eventually live or settle abroad. In the past, many who built up pension funds in the UK were happy to leave their pensions here but increasingly individuals – especially the wealthy – are eyeing up alternative options.

QROPS can provide a better solution than leaving accrued funds in a UK scheme. Typically there will be no requirement to purchase an annuity and possibly more flexibility in the form and timing of benefits as well as in the ways of dealing with residual funds on death.

A QROPS may in due course become a step towards a subsequent transfer to an even better ‘non-QROPS’ (Qnups) – an overseas scheme that is not subject to any of the QROPS constraints. These schemes have no reporting back to HM Revenue & Customs requirements even if the member decides to move back to the UK later. This can create new opportunities for investment such as buying residential property, no arbitrary borrowing limits, more options for taking income and greater inheritance planning potential.

A more established market

The overseas pensions market has become a virtuous circle. Few people wanted to be first in, but now the market is established, they don’t want to be left behind. Just think back to the early days of the self invested personal pensions (SIPPs)market to see how QROPS could grow as the message spreads and increasing numbers realise they can take more active choices.
Advisers and providers continue to enter the market, including some bigger players who are keen to market their plans on the back of their financial strength. Not only is this making pricing far more competitive and helping to drive up service standards, it is also building trust among consumers that there are robust systems and controls to protect them.

QROPS were created just over four years ago as a way for the Government to comply with EU rules allowing free movement of trade and services. But the QROPS regulations have the effect of imposing constraints which we believe, after taking legal advice, conflict with some aspects of EU law.

As EU citizens we have a right to buy our pensions from Germany, France or Italy; just as we have a right to buy cars made in other member states. At some point in the future there could be a legal challenge to some of the QROPS constraints being applied across borders so as to be imposed on schemes in other member states. For now though, most investors are going to accept QROPS as they are rather than risk fighting a potentially expensive battle over one of their most important financial assets.

In the meantime, it is a young market that is going through some growing pains – a few unscrupulous providers and wrangles over jurisdictions – but it is a market set to emerge more mature and competitive.

In the future, could we even see permanent UK residents start to switch on to QROPS? It is certainly possible because the nature of modern consumers is to seek out the highest quality products and services that give the best value for money almost regardless of where they originate. Many traditional British businesses have already lost out to overseas competition so we should not be blasé that our pensions are immune.

Ken Wrench is chief executive at London & Colonial