HMRC says the primary objective of the QROPS regime is to enable individuals leaving the UK permanently to simplify their affairs by taking their pension savings with them to their new country of residence.
A transfer to a scheme which meets three increasingly onerous sets of conditions: “overseas pension scheme”, “recognised overseas pension scheme” and “qualifying recognised overseas pension scheme” is a recognised transfer under the FA 2004 regime.
A crucial weak point, however, is the individual does not have to live in the country where the scheme is located. A transfer to a QROPS is a recognised transfer even if the individual has never left the UK. The many different tax regimes on offer are an attraction, but the choice of jurisdiction – which country you pick – can prove fatal.
HMRC has discovered, as they found after the stable door was thrown open for SSAS investment in the mid-1970s, that the merest genuflection towards the primary purpose might be made in the stampede towards much more compelling attractions.
HMRC’s consequent furious and frantic efforts to plug leaks in the dam have included banning certain jurisdictions such as Singapore altogether, and imposing stringent conditions on others, such as Guernsey and New Zealand in 2012. The result is a formidable wall of legislation and a still-growing compliance burden. The principal regulations (SI 2006/206) have been amended five times; 20 sets of regulations now affect QROPS.
Ironically, there is a gap in the legislation, to which we drew HMRC’s attention 18 months ago. The status for lifetime allowance purposes of a transfer into the UK from a QROPS which previously received funds from a UK drawdown arrangement cannot easily be identified. The opportunity for extra tax-free cash is more likely to be exploited by QROPS members returning to the UK to take advantage of flexible drawdown, now the minimum income requirement hurdle has been lowered.
Every fortnight HMRC updates a list of QROPS which choose to advertise their existence. UK providers originally felt safe in checking a QROPS was on this list the day before making a transfer, but since the fallout from the notorious ROSIIP case HMRC says the list is published merely to help UK registered pension schemes carry out their due diligence. If you have any doubts, HMRC cannot provide assurances of QROPS status.
Since 2012 the reporting requirements have become much more onerous. Data must be retained by a QROPS, and payments made reported to HMRC, for at least 10 years after the date of transfer. Should a QROPS decide to throw in the towel (or be delisted by HMRC), that is not the end of it either; HMRC’s tentacles persist into the afterlife. From 14 October 2013 a former QROPS is subject to the same rules and has to report to HMRC any payments it makes. Non-compliance risks triggering the member payment rules, and swingeing tax charges.
All this adds to the cost of genuine pension saving. At some point the question has to be asked: is this sustainable? Arguably the genie is out of the bottle: freedom of movement and international pension provision are here to stay, with no realistic prospect of tax regime alignment, not even within the EU.
It would help if the Treasury were to adopt the concept of “proportionality” in legislation, instead of adding to its armoury of sledgehammers to crack every new nut that pops up. They might also learn to distinguish pensions professionals from tax avoidance specialists.
Ian Neale is a director at Aries Pension & Insurance Systems