Friday, 26 March 2010

QNUPS Advice

QNUPS - the next major offshore pensions planning opportunity for UK tax-relieved pension funds and the interaction with QROPS.
The Inheritance Tax (Qualifying Non-UK Pension Schemes) Regulations 2010 [SI 2010 / 0051] came into force on 15 February 2010 and have introduced QNUPS.

The purpose was to correct an error in the Finance Act 2004. Without these amending regulations UK pension funds once transferred to a QROPS would become liable to UK Inheritance Tax (IHT) charges. These regulations now mean a non-UK resident may transfer UK pension rights to a QROPS and upon death, whether before or after age 75, no Inheritance Tax liability arises.

These regulations apply to overseas schemes generally. But they have wider application for two reasons :
1. taxable property rules associated with one form of QROPS and
2. a restriction on the tax relief available on pension contributions to high-earning UK residents.

The technical side
To be a QNUPS the overseas scheme must satisfy the same conditions necessary for a Recognised Overseas Pension Scheme (ROPS) (SI 2006/206) with the importannt exception that there is no necessity for there to be Double Taxation Treaty (DTA) with the overseas scheme’s jurisdiction if the scheme is outside of the European Economic Area. A DTA is not necessary because there are no reporting requirements from the QNUPS to HMRC.

The outcomes are that a QNUPS benefits from UK IHT exemption in respect of:
(a) UK tax-relieved pension funds that have been transferred to a QNUPS.

(b) contributions to a QNUPS and

(c) assets held by a QNUPS generally.

A QROPS will by definition be a QNUPS. But a QNUPS need not be a QROPS. This leads to the feasibility of using QNUPS as an ultimate destination for UK tax-relieved pension funds to gain further advantage.

A QNUPS (which is not a QROPS), is a good home for UK pension funds which were originally transferred to a QROPS. A QNUPS (which is not a QROPS) need have no specific investment restrictions and may for example invest in residential property and the like. But the key to this is transferring from the QROPS to a QNUPS.

For clarification we need to differentiate between “investment regulated” and “non-investment regulated” QROPS. This is a consequence of SI 2009 / 2047, effective August 2009. These taxable property provisions (relating to investment in residential property, fine wines, antiques, and the like) extend UK investment rules to some QROPS. If the QROPS is “investment regulated” then Paragraph 7A of Schedule 34 Finance Act 2004, provides for a 70% tax charge where investment is made into taxable property out of UK pension funds which have been transferred to the QROPS. But there are further implications.

What follows are direct quotes from the Registered Pension Schemes Manual (RPSM).
“A transfer from a UK pension scheme to a QROPS constitutes a Relevant Transfer Fund” (RPSM13102130). Then we have to consider whether that fund comprises a Taxable Asset Transfer Fund (TATF). All transfers from UK pension schemes to an investment-regulated QROPS since 6 April 2006 comprise a TATF.

This is important because: “A payment to a transfer member has to be notified to HMRC regardless of whether or not they have been non-resident for more than five tax years if it is deemed to have been made from their Taxable Asset Transfer Fund” (RPSM14101070).

An investment-regulated QROPS means that the member is able to direct or influence the investments made. Most Guernsey QROPS have concluded that they are not investment regulated. Some have not declared their hand and one considers the distinction to be “immaterial”. New Zealand QROPS are not investment-regulated pension schemes. Some Hong Kong QROPS have taken the same view. The same is likely to apply to schemes in Gibraltar, Isle of Man and Malta.

QROPS Advice: Expats Pension Defeat Highlight Importance of Advice

The defeat for the UK state pensioners in the European Court of Human Rights has highlighted the importance of getting sound financial advice when moving between jurisdictions.
The pensioners had their pensions frozen when they moved abroad and they have not been raised in line with increases for their counterparts in the UK. Financial advice may have averted this situation say advisers such as Blacktower Financial Management’s John Westwood.

“It again emphasises the fact that if people are going to leave the UK they do absolutely need to sit down and take some proper advice, preferably before they leave the UK, on their future and intended retirement planning,” said Westwood.

“So often these things are left and are not properly addressed until it is too late and what we are seeing now is expatriates living throughout Europe who are suffering badly because of sterling versus euro conversion rates. We are seeing hardship and unfortunately this only re-emphasises the point that anyone planning to move abroad must and should seek solid and quality financial advice before they make any decision.”

AES International’s Sam Instone echoes Westwood’s concerns and says although this will not put people off moving abroad in retirement, as this is invariably a lifestyle choice, consumers need to fully understand the different options available to them in different countries.

“People need to understand what benefits they are effectively giving up when they move abroad and how they will be treated by the UK government’s pension and benefit laws in different countries,” said Instone.

“Unfortunately people time and again underestimate how much they will need in their retirement and will often end up, despite starting off living the lifestyle they desire, in fairly dire straits. This is particularly the case when proper financial advice is not taken.”

Westwood also doubts whether this ruling will make people reconsider moving abroad as the decision is usually influenced by other factors rather than just for financial motives.

“I do not think people will reconsider. The decision to move abroad is based on a number of factors and it is not just “how big is my pension going to be” there is a whole catalogue of lifestyle issues that are being considered, including family and of course employment issues,” added Westwood.

“It depends on how the retiree views their time horizons – if they view the move abroad as a permanent move as long-term lifestyle option then they should consider the feasibility of removing the pension fund into an international contract, allowing more flexibility and the ability to match currencies versus income and mitigate certain unwanted taxes as well - for example, a QROPS or that type of plan.”

QROPS Advice: 4 Million Expats to return to UK

Almost 4million Brits living abroad are planning a mass return to home shores after seeing their savings and income stripped by the plunging values of the pound and their property.
The dramatic slump has slashed their income by a third and has turned Brits into the paupers of Europe.
Fears over job security and falling property prices are also giving expats second thoughts, according to research from foreign exchange specialist Moneycorp.
Some 845,000 Brits living in Spain and France have suffered an 8 per cent drop in house prices in the year to August 2009 alone. This wiped €30,000 off the average property on the Costa del Sol.
Sterling has slumped from over €1.50 to £1 in January 2007 to close to parity, taking a terrible toll on the estimated 5.5million British expats, and particularly the 1.1million pensioners living abroad. Moneycorp research shows that 70 per cent of all expats are now considering returning to the UK.
A retired couple living in Spain, for example, both drawing a full state pension of £95.25 per week, will have seen their combined monthly income - on their pension alone - drop by €396 over three years, from €1,263 to €867.
The warning signs that hundreds of thousands of Brits may be ready to return to the UK started when the credit crunch began in 2008. That year, the number of expats returning home jumped by a fifth on the previous 12 months.
The number of British homeowners downsizing or selling up and sending money back to the UK doubled last year, foreign currency specialist HiFX reports.
It has seen an 180 per cent increase in the number of euro to sterling transactions and an 11 per cent increase in the number of U.S. dollar to sterling transactions in the past six months, compared to last year. More people over 65 than any other age group are repatriating.

• Retirement dream shattered for British OAPs in Australia after court bid for pension hikes is lost
• Hundreds of British expats stage march in Malaga over plans to demolish 'illegal' holiday homes
• Homes abroad: News and advice
• What next for the pound?
Mark Bodega from HiFX says: 'The pound's fall to historic lows in recent months has meant the cost of living or running a holiday home on the continent has risen to unaffordable levels for many people.'
A weak property market is also proving to be a nightmare for many of the estimated 1.5million Brits who own homes abroad. Many are being forced to sell their property at a loss, particularly in countries like Spain.
The weak pound has proved a blessing for those who receive an income in euros, for example from renting a property. Sterling's slump means they will get far more pounds for their euros.
Brennon Nicholas, managing director at estate agency Cluttons Spain says: 'We have seen an increase in the number of people coming to us who are struggling because their pensions and savings do not stretch as far as they used to. They're selling up because of the favourable exchange rate but the market is extremely tough and there is a lack of buyers.'
Pensioners abroad have arguably been hit the hardest as they rely most heavily on their savings and pensions built up in the UK. They've been hit by a declining pound and falling interest rates.
One in five expats claims a sterling pension, with more than a quarter of Brits living in Spain (28 per cent) and a third of British expats in Germany relying on this as their core source of income, according to Moneycorp.
More than half a million pensioners living in Commonwealth countries such as Australia, Canada and New Zealand suffer a further blow because their state pensions don't rise each year in line with inflation.
Only those living in the European Economic Area and countries with reciprocal agreements in place with the UK, such as the U.S. and Jamaica, are protected against inflation. Yesterday, these pensioners lost their fight in the European Court of Human Rights to prove this pension freeze violates anti-discrimination rules.
Tim Finch, head of migration at think tank the Institute for Public Policy Research says: 'The weakness of the pound will mean more people will lose jobs and find it harder to live overseas and come home. This is likely to be a growing trend over the next few years.
'Generally, the big wave of lifestyle emigration where people got their place in the sun for a better life was a reflection of the boom years when you had high house prices and decent pensions.'
"When moving to a foreign country which has a different currency it is very important to consider moving one's savings into the base currency of their new country of residence. This is ensure that income and expenses are in the same currency in order to mitigate the effect of exchange rates, which for British expatriates holding sterling and currently residing in the Euro zone is very marked as their income has reduced significantly given the devaluation of the pound. A QROPS enables British expatriates to move their sterling based pensions outside of the UK and hold the underlying investments in the same currency as that of their new country of residence. This helps mitigate the impact of foreign exchange rates on income and the real value of one's pension."