QROPS – The Facts
QROPS has resulted in substantial repercussions for advisers and their clients.
Qualifying Recognised Overseas Pension Schemes, or QROPS for short, are not new. HMRC allowed non-resident UK pension scheme members the ability to transfer their accumulated pension assets to another jurisdiction without tax or transfer penalties back in 2006; but QROPS have truly taken off in the last year.
So what has been happening?
In short a combination of misunderstanding, misinterpretation and flagrant flaunting of the rules, have combined to make what was already a new and as such untested concept increasingly unclear for advisers and their clients. Worse still it has meant HMRC has been on the war path.
As a relatively new concept much about QROPS is untested and real expertise and understanding is limited. This gap in requisite knowledge has not been helped by the lack of clarity, on certain aspects, from HMRC. However, that is no excuse for poorly designed products, particularly when there is a client’s life savings at stake. HMRC has already retrospectively reappropriated monies owed, leaving people with a substantial bill.
Common QROPS misconceptions:
1. You can include residential property within your pension under QROPS. There is debate amongst scheme providers but in our view HMRC has been quite clear; it is not allowed. Exceptions are untested, but breach the rules on this and an unauthorised payment tax is likely to be levied on the value of the property, a potentially very expensive mistake for your clients.
2. After five years, undertaking to HMRC ceases. There have been some quite significant misinterpretations of the five year reporting rule which persisted in 2009. QROPS providers have a duty to report distributions made to members for the first five years of them being non-resident in the UK to HMRC. Furthermore they have an ongoing requirement to meet the obligations and up-hold their undertaking which lead to HMRC recognition and scheme approval. Some providers have chosen to interpret this to mean that after the five year reporting period is up they no longer have to adhere to the obligations for recognition. The consequence of this has been certain schemes allowing large distribution or total encashment that breaches the 70% rule. This generates a large tax charge for the offending member and a potential disqualification for the provider and implications for all members within that scheme.
3. You can take 30% of the transfer value of your scheme as a tax free cash lump sum. Not unrelated to misconception number 2 and again, this is simply not the case. HMRC states QROPS need to keep 70% of the transfer value or the tax relieved contributions (depending on where the scheme was established) for the provision of an income for life. So surely that means you can take the other 30% tax free? It is nice and neat but, no. Lump sum payments in excess of 25% are chargeable as unauthorised payments with a tax charge of at least 55%. Furthermore, the FSA issued a warning on the dangers of depletion of pension assets through excessive drawings this year; in HMRC’s eyes there really is no excuse for getting it wrong.
4. You can take a loan from your QROPS scheme. How convenient that would be, but no. Any loan to the member, their immediate family or beneficiaries will be seen as an unauthorised payment and is likely to result in a tax charge. Sadly there are still numerous providers who openly promote this option. HMRC has already taken retrospective action on loans. The result for scheme members is a tax bill and legal fees, which will almost certainly come to sums that exceed that of the loan.
Retrospective action
Advisers, clients and some providers may be unclear on these points but HMRC is not. Last year was the year of retrospective action and it was costly; scheme members were taken to task and left with legal fees and tax charges of up to 82%; providers have been ‘struck off’ the recognised QROPS list and action has even been taken on a regional scale with the removal of Singapore as a QROPS jurisdiction this year. There is also, of course, the cost of lost trust and blemished reputations, something you can not put a price to.
The majority of QROPS providers are little known or small independent companies. Their size, lack of financial accountability, scale and breadth of expertise in this area has significantly contributed to the misconceptions that prevail around QROPS. I should hastily add not all such companies are guilty of this and indeed this does not mean all large companies have been blameless in this regard. Quite the opposite. However this network of small inexperienced and, in some cases unaccountable providers, has definitely contributed to the proliferation of misunderstanding that we see played out around the globe.
Looking ahead
What is likely to happen - We think last year clearly showed HMRC will take action against jurisdictions that allow product providers to breach their QROPS obligations or potentially place clients in jeopardy of unnecessary tax liabilities. We expect more black listings this year where jurisdictions do not play ball.
Given the misinterpretations of the five year reporting rule it is reasonable to anticipate HMRC might well extend the reporting period for QROPS. This could result in retrospective tax on distributions that have breached the 70% rule. With ‘tax take’ key for HMRC right now this is an obvious source of revenue.
Similarly, expect to see tax being collected retrospectively for any holding of residential property. Many QROPS scheme members do hold residential property within their schemes and will benefit from guidance now rather than later.
With annuity rates at record lows there is evidence drawdown is being accelerated by some product providers to boost income. Do not succumb to temptation; advisers and members taking advantage of this could see any excess over 120% (soon to be reduced to 100%) of GAD rates resulting in unauthorised payment charges being levied.
Last but not least, we expect a significant increase in QROPS transfers. This really is a market that is largely untouched and there are advantages for everyone involved, from adviser to scheme member to product provider. Sentiment towards pensions in the UK is likely to remain negative in 2010/11. This is particularly due to the current economic and political climate. QROPS is an efficient means of consolidating various pension pots from different employers into one single efficient plan, currency risk can be mitigated and it opens up a range of retirement benefit and succession planning options.
Source: Leading Industry Expert.