The Origins of QROPS

Posted: 09 September 2009
The origin of QROPS can be traced back to August 1994 and Sydney Australia, when a UK based financial adviser trained in Australia met with leading lights of the Australian financial planning fraternity.  Discussions took place, agreements made and Tower Bridge, an Australian superannuation scheme which incorporated UK retirement provisions, was launched.   Today we see QROPS and what are they?  They are in essence the one and the same, i.e. an Overseas Pensions Scheme operating as a UK scheme.  Hence the claim that QROPS emanated from an inspired suggestion of Geraint Davies, Managing Director of Montfort International.

Prior to 6th April 2006, any individual wanting to move his orher UK pension fund from the UK to an overseas scheme had to find or create a QROPS forerunner, then the scheme rules had to be fully checked to show that rules embedded in the scheme had specific conditions, in what was referred to by the then Inland Revenue as Appendix 6.  

Members also had to provide a series of documents proving that they had ceased living and working in the UK; these were difficult to enforce and were reliant on opinion of UK schemes and advisors.  That rule was dropped in the QROPS rules of April 2006.

In addition, evidence of taking up employment was required as well as showing evidence of residing in the same country as the scheme.  Gone is evidence of employment and the member being resident in the same country as the QROPS.  However it should be noted that the country of scheme residence may require employment as a pre-requisite of receiving what are, as far as they are concerned, new monies.  In certain circumstances, one such country that requires this is Australia.

And though ceasing living and working in UK has gone, it really should be noted that QROPS are only really suitable for those will end up having stopped living and working in UK.

It is to the history of QROPS and what was first an Australian and then a New Zealand option that one now has to look at what has to be taken into most definitely taken into consideration when advising on QROPS.  The old rules required working in the new country and the Australian and New Zealand solutions were in anyway enforced inspirations as they were riddled with tax issues.  Tax matters and residency permits or visas remain fundamental starting points for any adviser wishing to advise on QROPS.

Though the onus has shifted from the individual, to provide evidence, to the receiving overseas scheme to apply to be recognised as QROPS with the UK's Her Majesty's Revenue and Customs (HMRC) and report back to the UK, it has shifted elsewhere.  QROPS advice is now firmly located in every UK financial advisers back yard, if residency and tax are an issue and overseas options are different and one doesn’t have to transfer funds to a members country of residence, one has to factor QROPS into all advice provision.  And if not convinced, leaving a UK pension scheme as is, for a would be or actual migrant or returning national, then one is ignoring the fact that some countries tax advantage their own retirement products but tax disadvantage what to them are foreign schemes.

HMRC's decision was to monitor the UK pension funds post transfer overseas and to ensure that scheme members were not cashing in their funds and bringing them back to the UK in the short-term.  This was a shift in monitoring processes.

In order to become a QROPS and accept UK pensions transfers, an overseas scheme would have to meet the HMRC's criteria for pension schemes set out in 2006/206 Statutory Instrument.

Once QROPS approval is granted, overseas schemes are required to report back any payments made to scheme members, to HMRC for five complete UK tax years of their residency. So exit timing is crucial and interaction with CGT and IHT cannot be ignored.

Now any individual with a UK pension scheme (except for a final salary scheme in pension receipt phase) can transfer their UK benefits into a QROPS if they wish.  Members do not have to migrate or be a returning.  The overseas transfer eligibility requirements now firmly rest with the receiving scheme rather than the individual.  Though clearly there is some due diligence required by the ceding scheme and any UK advisor who is in any way involved to avoid obvious cases of fraud.  UK advisors are well advised to establish due diligence processes for QROPS.  Financial advisors should check with their compliance departments and any external para-planning services as to the effectiveness of their advice procedures.

The first consideration is: can the QROPS accept the UK pension transfer in the first place? HMRC has, on its website, a list of overseas schemes that have been recognised as a QROPS. However, although the schemes listed are known to HMRC - it does not mean that they are willing, or able, to accept transfers in. USA has its 401k schemes that, although listed as QROPS on the revenue website, legal opinion suggests they cannot accept UK pension transfers in.

Obligations

Another important consideration is to due diligence check as to whether the receiving QROPS is aware of their obligations regarding the UK transfer money received.   Having received a UK pension transfer the overseas scheme now a QROPS has many ongoing responsibilities as to the treatment and payment of the UK pension benefits after they are received. The responsibilities of the overseas scheme are more involved than simply applying to HMRC. Should the QROPS not fulfil its ongoing obligations, it may have its Qualifying Recognised Overseas Pension Scheme status withdrawn and the member could be subject to tax penalties.

Members of a UK pension scheme, seeking to transfer to an overseas scheme, need specialist advice to ensure that all aspects of the transaction are compliant and the schemes ongoing responsibilities are maintained.

When paying out benefits to members a QROPS must ensure that the scheme follows the rules of a UK pension scheme for a full five UK tax years of the member's overseas residency. This is known as the reporting period.

If, within the reporting period, a QROPS pays out benefits before the client reaches age 50 (increasing to age 55 from 6th April 2010) an unauthorised payment charge could occur unless the benefits were paid out in the circumstances of serious ill-health.

In addition to when the benefits are paid, how they are paid is also restricted within the reporting period. A QROPS is only permitted to pay benefits in the same format as a UK scheme. For example, income levels from the QROPS can not exceed the maximum under UK annuity or USP (unsecured pension) rules. Therefore, if a member takes their benefits out as a 100% lump sum (because the local rules in the country of the overseas scheme allow this) a UK as well as potentially a local tax charge would apply.  The HMRC rationale being that UK rules have been flouted.  The penalty is tax on what is known as an Unauthorised Payment. HMRC levies a charge, of 40% of the unauthorised payment with an additional surcharge of 15%, totalling 55% tax payable for the member. In addition, the scheme could lose its QROPS status.

There are many advice issues that a UK adviser faces before recommending a QROPS. The local tax rules of the scheme are major considerations. Is there tax on the investments within the scheme? Does the scheme make any tax deductions at source when benefits are paid out?

As the member no longer has to be residing in the same country as the QROPS, the local rules of where the member is tax resident must also be taken into account as a separate issue.  What are the income or inheritance tax rules in the member's local jurisdiction? Does the local regime tax individuals on their worldwide investments? Will holding funds in certain QROPS increase the member's liability on these fronts?

And the compliance obligation deepens as the permitted investments of the QROPS must not contravene the list of permitted investments set down in the HMRC legislation.

Accrued benefits

UK advisers must also consider any pension benefits a member accrues while abroad. Should the UK pension benefits be transferred across to the member's overseas employer's scheme (provided it is a QROPS)? Are UK adviser's aware that mixing UK benefits and overseas benefits this way leads to the overseas benefits falling under the UK rules? This would clearly have an impact on the member's retirement planning.

The exchange rate would also have an influence in the decision on when to transfer to a QROPS. Does the QROPS only accept transfers in, providing the funds are converted from sterling to local currency? If this is the case, what exchange rate is applied? Is it a competitive rate? Are the funds being transferred at a time when the pound sterling is strong or weak against the local currency?

Advisers need to ensure that their clients take specialist advice in all of these areas to ensure their UK pension funds are being transferred to a QROPS appropriately.

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