Advisers thinking they can use the Qrops rules to move clients’ cash out of their UK pension pots may end up with a big fine if they do so in circumstances where their client is not emigrating.
The Revenue’s position is now clear. Anyone using Qrops plans where there is no intention to become a long-term resident overseas is guilty of pension-busting. In such circumstances, transfers to Qrops schemes will count as unauthorised payments and will be charged 55 per cent. What’s more, the Revenue now wants Qrops to have similar terms to pension schemes in the UK.
The writing was on the wall for a broader role for Qrops when the Revenue removed authorisation from schemes in Singapore in May. Details of exactly what will happen to funds held in those schemes is yet to emerge but it seems likely that they will now be fined with the unauthorised penalty.
The situation is complicated for advisers because of the way in which Qrops have been, and can still be, marketed. Overseas firms promoting Qrops to UK-based IFAs are not governed by the FSA and some of the claims made about offshore pensions stretch the UK’s rules for financial promotions.
For example, some websites promoting Qrops are pitching them as being safer than Sipps because they enjoy a higher level of investor protection. It is true that policyholders with plans from offshore life insurers based in the EU and Channel Isles do benefit from the protection of the UK’s Financial Services Compensation Scheme and at a time when investor security is probably the number one priority for clients, this argument no doubt resonates for IFAs. But any product that could have the rug of Revenue authorisation pulled from underneath it at any time can surely not be described as safe.
But Qrops are not going away. With more people retiring abroad and a growing internationally mobile workforce, the market for what the Revenue would perceive as legitimate Qrops looks set to grow.
Guernsey has moved to protect its Qrops industry by bringing its schemes in line with the UK. The Guernsey Tax Office is adamant that it initiated discussions with the Treasury about making its Qrops schemes acceptable to the UK. It has now changed its rules to bring its schemes in line with UK pensions, restricting tax-free cash to 25 per cent and introducing a minimum age of 50 for the receipt of benefits from the scheme. It has also moved to prevent its Qrops schemes being used as a stepping stone to schemes in other jurisdictions with more relaxed rules.
Guernsey was one of the bigger centres for Qrops business and its relationship with the UK made such changes more likely. Whether other jurisdictions will follow suit remains to be seen. New Zealand and Hong Kong have seen a lot of interest from UK pension advisers looking to offshore their clients’ funds. But the Revenue’s threat is likely to be enough to frighten most IFAs from recommending Qrops in all but cast iron cases.
The benefits of Qrops for people who will not be resident in the UK when they retire remain. They do not require the investor to buy an annuity at age 75 and allow investment in an unrestricted range of asset classes, including residential property. And investments in Qrops are free of UK tax once the individual has been resident abroad for five years.
They are also efficient for inheritance tax, can give protection against creditors and offer confidentiality. They also offer security against changes of tax rules in the new jurisdiction, at least until benefits are taken.
The Qrops free-for-all may be over but the transporting of pensions overseas is likely to grow given current demographic changes. As a result, charges on Qrops transfers, currently around 7 or 8 per cent, not including fund management charges, could come down considerably. With a significant proportion of the population wanting to retire to sunnier climes, Qrops are here to stay, just not in the form that some had hoped.
John Greenwood is editor of Corporate AdviserMoney Marketing