Tuesday, 18 May 2010

QNUPS and QROPS Advice: Regulation & financial stability still key to QROPS advisers

Regulation and financial stability are still paramount to IFAs when it comes to selecting a QROPS provider, according to a survey by Skandia International.

The firm said the events of the last few years, including the collapse of banks, a global recession and the offshore review, had ensured these two issues continue to be key priorities for advisers when selecting a QROPS provider and jurisdiction for their clients.

Investors protection was ranked third on the list of important criteria to consider, said Skandia, which suggested advisers should consider the protection available not only from the jurisdiction of the QROPS provider but from the jurisdiction of the underlying investment.

The availability of low or no inheritance tax ranked fourth, while the potential to receive a 30% tax-free cash sum allowance came in fifth. The requirement that the QROPS jurisdiction be English speaking and the perceived privacy of the jurisdiction ranked low on the list of essential criteria.

Skandia also found 73% of advisers preferred to use Isle of Man or Guernsey as the jurisdiction for a QROPS while Hong Kong came in as the third most popular.

“Pensions and therefore a QROPS are a long term investment and it is for this reason that it is so important to look at the jurisdiction that the investment is held in,” said Rachael Griffin, head of product law and financial planning at Skandia International.

“When making a decision on jurisdiction, a number of factors need to be considered such as financial security and of course the jurisdiction tax rules. For example it may be that the QROPS provider insists on a member being a local resident, or the particular pension rules of a jurisdiction insist on certain restrictions on investments."


QNUPS and QROPS Advice: Malta's entry to QROPS arena offers regulatory certainty

In April 2006, HMRC enacted 'Pensions Simplification' on what is generically now called 'A Day'. This piece of legislation, amongst other things, replaced the previous regulations governing the application to transfer pensions from UK Regulated schemes to an overseas arrangement.

The fundamental change in the legislation is that HMRC now provides a list of schemes that it is prepared to register as QROPS, which gives scheme administrators a streamlined process in transferring.

If an overseas pension scheme/fund has a QROPS number and is on the list, UK pensions may transfer to it without attracting an "unauthorised payment charge".

Caveat emptorHowever, there is an important caveat, in that HMRC has changed the terminology in relation to what it means to be "qualifying".

The original list published by HMRC had the following heading: "This is a list of Qualifying Recognised Overseas Pension Schemes (QROPS) that have consented to have their details published – not all QROPS will necessarily feature within it. It is not to be taken as a recommendation for a particular scheme or product."

This gave the impression, together with the letters issued to the individual schemes, which stated that: "I am pleased to accept that the scheme is a QROPS with effect from ......" that HMRC had actually individually approved schemes.

HMRC backtrackIt would appear that HMRC has had second thoughts and has dramatically changed its wording, which now reads: "... Publication on the list should not be seen as confirmation by HMRC that it has verified all the information supplied by the scheme in its application. If the scheme has been included on this published list in circumstances where it should not have been included because it did not satisfy the conditions to be a QROPS, any transfer that has been made to that scheme, could potentially give rise to an unauthorised payments charge liability for the member (RPSM14102020)"

What this means is that HMRC may at any time remove a scheme from the QROPS list at its discretion.

Jurisdictional riskThe risk, therefore, is in members transferring to schemes in jurisdictions that have lax pensions legislation, and which have abused or been seen to abuse the spirit of the regulations, even if not the actual regulations themselves.

They might find themselves caught up in un-authorised payment charges, due to the actions of their trustees who have not followed the legislation in conducting investments or distributions etc, for themselves or other members of that scheme. A number of overseas/offshore jurisdictions have comparatively lax domestic rules regarding the management of International Pension Schemes, which may lay them open to retrospective action by HMRC.

The Maltese optionMalta has a unique advantage in the QROPS market, in that it has no legacy business, and its pension legislation is based on the domestic UK model and was only passed last year.

The Malta Financial Services Authority (MFSA), requires companies who wish to transact pension business not only to apply for a Pensions Administration Licence, demonstrating their ability to administer pension schemes, but also each and every individual scheme has to be individually approved and regulated. This makes Malta one of the most comprehensively regulated QROPS providers.

Malta therefore offers potential members the important comfort factor, of not only being an EU member state (not a "tax haven"), but also a very strict detailed regulatory system.