Be careful where you QROP

The 2006 changes in UK pension legislation prompted an explosion of pension related transfer opportunities. The accompanying divergent views and investor speculation on QROPS transfer options only served to polarise opinion and confuse even the most competent financial advisor.

Four years on, with experience under our belt, it is still beneficial to go to back to basics if we are to understand the current opportunities offered by QROPS.

It all began with the advent of the 2003 European Union’s freedom of transfer of monies directive, which gave private investors the opportunity and flexibility to invest across the EU and choose those jurisdictions that appeared more attractive by virtue of lucrative tax benefits and incentives.

This directive represented the first step on the way to an internal market for occupational retirement provision organised on a European scale. Indeed with the UK pension regime overhaul in 2006, great industry attention has been given to those investors who hold dormant UK private and company pension schemes and the opportunity to transfer the value overseas through the HMRC authorised QROPS system.

With now over 170 authorised schemes investors are offered a multitude of options if they wish to transfer their pensions to an authorised jurisdiction.

Traditionally, the most popular options for clients advised by their financial advisers have been the crown dependent channel-islands: Guernsey and the Isle of Man. Schemes are also now available in mainland Europe through Gibraltar, Malta, Latvia and Lichtenstein, and further afield in Australasia, namely Hong Kong and New Zealand.

With such rich and attractive transfer opportunities brings the quandary – which jurisdiction is the most suitable and why? Which jurisdictions offer the best value and benefits and how is any potential risk minimised for investors’ hard-earned pension transfer values?

The first port of call must surely be the client’s financial objectives and personal situation. If clients have been non-UK resident for more than five consecutive tax years then a QROPS could certainly be beneficial. Trustees of the overseas pension scheme are no longer required to report back to the UK Inland Revenue and so the client’s offshore tax position remains only in the jurisdiction where they reside. Qualifying Non-UK Pension Scheme (QNUPS), which in effect is an unregulated version of a QROPS and provides looser boundaries are also an option.

Clients who have not been non-UK resident for the five year period or who may return to the UK should think carefully about whether a QROPS is an option for them or whether a Self Invested Personal Pension transfer is more beneficial.

So if a QROPS is preferred, then where to go?1. Crown dependant territories:
Channel Islands:
With their rural village-like ambiance and historical importance to the UK’s financial services industry, the Isle of Man (IoM), Guernsey and Jersey give the appeal of solid regulatory foundations and bespoke tax and financial planning solutions.

Almost all island pension arrangements, whether local or overseas, fall to be considered by the local Income Tax Authorities. The Income Tax legislation imposes a regulatory framework within which these “approved” arrangements must operate to maintain their tax favourable status. The rules vary depending upon the type of arrangement concerned.

In addition, the Income Tax Authorities issue codes of practice, or guidance notes, with which different types of scheme must comply (such as the practice notes for local occupational schemes, the code of practice in Guernsey for Retirement Annuity Trust schemes (or RATS) and the special regime for small self-administered schemes in Jersey).

Pension arrangements, both overseas and local, which are established under trust, are subject to trust statutes and other financial legislation in both islands. It also determines the rights available to members of those schemes. This can have significant implications for trustees and employers. In addition, where in either island schemes are provided or administered by insurance companies, those companies will be subject to the islands’ insurance legislation.

Similarly, the IoM Retirement Benefits Schemes Act 2000 established a broad framework catering for all schemes operated in or from the Isle of Man. Under the Act, separate sets of regulations have been introduced catering for international schemes (those being schemes that are managed from the Isle of Man yet do not have any Isle of Man resident members) and domestic schemes providing benefits for Isle of Man residents.

Michael Foot the ex FSA chairman produced a substantial white paper focused on the crown dependant offshore tax havens that have for so long tempted private investors to invest or indeed up sticks and reside there.

Foot’s paper suggests four key recommendations:

1.Increased financial supervision and transparency
2.Increased taxation to promote financial stability, sustainability and competition
3.Pro-active financial crises management and resolution
4.Increased international co-operation
In essence, Foot focuses on bringing these jurisdictions in line with the mainstream international community. Interestingly, this means tax information exchange agreements (TIEA’s) are already being adhered to and the possible introduction of withholding, value added, capital gains and corporation taxes.

This is echoed with the forthcoming EU Code of Conduct group’s recommendations for zero-10 tax systems and compliance with any new tax directives given. Indeed, the IoM has already introduced withholding tax and TIEA’s are in force with a commitment to automatic exchange of information by July 2011. Guernsey and Jersey have TIEA’s and are also considering their positions on taxation related issues.

When considering QROPS, it is worth noting non-residents will currently pay full income tax on pensions received in the IoM, with Guernsey rates at nil at present and Jersey to open pension planning to non-residents in the near future. The relevance of changes in tax legislation and scrutiny of offshore financial shelters is also an important issue to bear in mind when transferring pensions away from the UK.

Gibraltar:
Highlighted in the Foot report as a crown dependency, the above recommendations will also apply to this jurisdiction. Gibraltar has fairly or unfairly been targeted by HMRC due to its nil taxation rate for retirees at 60. This position has recently been resolved and Gibraltar is returning as an authorised QROPS jurisdiction.

2. Member states of EU, Lichtenstein, Latvia:
New to the QROPS scene, Malta offers an alternative to the crown dependencies due to its independence as a EU domiciled jurisdiction. The Malta Financial Services Authority have also worked with HMRC over the last two years to ensure a robust QROPS system is in place (unlike other jurisdictions where the authority is initially granted and then scrutinised at a later date). Indeed, each individual scheme is approved and regulated to ensure a comprehensive structure is in place.

Liechtenstein and Latvia are interesting, with the latter proving popular with ex-service personnel. However, the service personnel and veteran’s agency (SPVA) is now in liaison with HMRC on the suitability of this jurisdiction. The Liechtenstein disclosure facility (LDF) is one example of how the UK Inland Revenue is giving jurisdictions considered as ‘opaque’, a tax haven amnesty for investors to declare savings. On this basis, both jurisdictions maybe considered less attractive to the pension investor.

3. Wider Jurisdictions:
QROPS maybe domiciled where the UK has completed double taxation agreements (helpfully listed at http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM14101046.htm).
Such agreements contain provisions as to exchange of information and non-discrimination.

In the past few years, we have seen HMRC flexing its muscles and withdrawing status from those trustees deemed unfit to hold the authorised QROPS status. Singapore based QROPS provider Panthera and most recently Hong Kong based Beazley trustees, suffered such a fate. Those investors who transferred their pensions could then be charged a crystallisation benefit charge and an unauthorised transfer charge totalling 55%.

A former Crown colony, Hong Kong itself remains authorised and is generally recognised as a non-EU authorised jurisdiction. This may appeal to those investors looking for non-EU based tax havens, as this jurisdiction gives resident and non-resident investors favourable tax treatment. Schemes are fully authorised under the mandatory provident schemes ordinance and thus are domiciled in a well-regulated jurisdiction. Hong Kong has also made great changes to its social benefit structures and thus begins to boast a new and innovative regulatory structure compared to other jurisdictions.

New Zealand (NZ) has also fallen under HMRC’s spotlight amid claims of trustees allowing pension-busting schemes. Nonetheless, this remains an authorised jurisdiction and indeed is defended by some IFA’s as a suitable jurisdiction for pension transfer with the territory allowing more than 25% commutation of pension rights if the member is to remain a non-NZ resident. Along with Australia, NZ offers some of the most comprehensive regulatory arrangements for retirees.

The future
Along with the EU directives, the OECD has produced white papers on the concern for retirement provision for member countries. With public sector income levels in decline, many governments are encouraging individuals to supplement income with private pension savings.



For expert QROPS advice go to http://www.qrops-advisers.com or call 01664 444625

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