New QROPS rules may leave trustees more wary of transferring funds overseas, finds Wyn Derbyshire, head of pensions in the London office of law firm King & Wood Mallesons.
An important element of the UK’s registered pensions scheme system has been the willingness of HMRC to recognise suitable overseas pension schemes – most particularly qualified recognised overseas pensions schemes (“QROPS”) - as being capable of accepting transfers of pension rights accrued under UK registered pension schemes without tax penalty.
The ability to transfer without penalty has not only encouraged the growth of British ex-pat communities overseas, particularly (but not exclusively) in countries such as Australia and New Zealand, but has also proved to be of important benefit to citizens of such countries who have accrued significant pensions savings under the UK’s registered pensions system whilst working in the UK, but who subsequently wish to return to their home countries, taking their accrued pensions saving with them.
Recently, however, as a result of recent changes to the UK pensions system as part of the drive for greater pension flexibility, coupled with the desire to be seen to be fighting tax fraud within the pensions arena, HMRC has toughened its stance as regards the qualifications that overseas pension schemes must manifest before they can be considered to be QROPS.
Loss of QROPS status could have serious consequences”
In particular, in April 2015, HMRC issued letters to overseas scheme providers requiring them to confirm that all QROPS under their administration comply with UK requirements for QROPS. This placed a particular emphasis on the requirement that QROPS generally must not allow members who have transferred pension funds deriving from UK registered pension schemes from accessing their funds before the “minimum pension age” which applies in relation to UK registered pension schemes (typically age 55), except in cases of serious ill-health.
The deadline for supplying these reassurance the 17th June 2015 and HMRC has announced the temporary suspension of its “approved QROPS list” pending clarification of which schemes have and have not provided suitable reassurance.
Unfortunately, in several of the relevant overseas jurisdictions (for example Australia), many of the pension schemes there being operated as QROPS did not have a minimum age limitation built into their governing provisions. In Australia and New Zealand, for instance, access may be permitted before age 55 on grounds of “serious financial hardship”. Technically these schemes failed to qualify as QROPS as defined by HMRC.
HMRC’s approach has led to a number of overseas providers questioning whether they wish to continue providing QROPS services at all, and some commentators have predicted a sharp reduction in the number of overseas schemes qualifying as QROPS in the future.
Registered schemes in the UK will be far more cautious about agreeing to overseas transfers”
Certainly recent months have seen reports of large numbers of overseas pension schemes in countries such as Australia, New Zealand and Ireland apparently voluntary de-listing themselves from HMRC’s approved QROPS list.
Loss of QROPS status could have serious consequences not only for the overseas pensions industry generally, but also for member and prospective members of these schemes.
In particular, under UK tax rules, the loss or voluntary abandonment of QROPS status means that whilst members who have already transferred UK accrued funds to an overseas scheme (before 6 April 2015) may continue as members of that scheme (and benefits may be paid out provided the payments are in a form that a QROPS will pay), the former QROPS would be unable to accept transfers of funds from UK registered pension schemes in the future without tax penalties falling on the transferring members.
Such penalties could be significant, possibly amounting to 55 per cent of the value of the transferred funds (and in some cases even higher).
Transfers made after 6 April 2015 to schemes no longer deemed to be QROPS may also be vulnerable to UK tax. Furthermore, subsequent transfers of UK-derived funds from one overseas scheme to another could also attract tax penalties if the recipient scheme does not enjoy QROPS status.
In the future, it seems likely that registered schemes in the UK will be far more cautious about agreeing to overseas transfers without compelling proof of the recipient scheme’s QROPS status. Individuals seeking to transfer their accrued rights overseas are therefore likely to find the task much more difficult (and potentially expensive) than was formerly the case.
Wyn Derbyshire is head of pensions in the London office of law firm King & Wood Mallesons.