When HMRC’s new rules for Qrops came into force nearly a year ago, pension advisers could breathe a sigh of relief that at last they now had clarification of product guidelines and what constituted a legitimate qualifying scheme.
To a certain extent, the tightening up of rules was also appreciated by clients themselves who for far too long had felt bewildered over encashment possibilities and tax rules that applied.
New rules meant the requirement for providers to report back to HMRC on payments out of the scheme for 10 years from the date of the overseas pension transfer rather than for five years from the time the client left the UK.
A further amendment to the rules also meant that residents in Qrops jurisdictions have to be treated the same as non-residents for tax purposes. Those jurisdictions that did not alter legislation to comply found their Qrops schemes struck off HMRC’s approved list.
This change alone saw over 300 schemes in Guernsey delisted and the centre effectively pull out of the Qrops market.
The message from HMRC remains loud and clear. Stiffer reporting requirements on payments and transfers puts Qrops on a footing with onshore pensions in terms of tax treatment as well as ensuring they remain fit for the purpose they were initially designed for – to provide an income in retirement rather than moving overseas to access a larger-than-recommended tax-free lump sum after the initial five-year reporting period.
So, 12 months down the line, have we seen a dramatic change in the Qrops market?
While the new rules have put a stop to loopholes that saw schemes offering headline encashment options that attracted expats like bees around a honey jar, it has not been a trouble-free transition for advisers.
The shock of a well regulated centre such as Guernsey losing its number one slot in the marketplace is arguably one of the downsides of the changes as it has meant advisers who valued the centre’s depth of knowledge and expertise in Qrops have had to look at other jurisdictions and schemes they are perhaps less familiar with when placing new business.
And while centres opting for full co-operation with HMRC continue as players in the market, we have seen new jurisdictions such as Malta and Gibraltar adjust their own Qrops legislation to attract providers.
During this time, advisers have needed a period of readjustment to fully understand how these newer jurisdictions operated and to find out whether they offered the level of expertise and regulatory back up necessary together with assessing how new legislation and tax treatment impacted on clients seeking to transfer their pensions.
As far as choice is concerned, the new rules saw the Isle of Man remain relatively unscathed in terms of the number of Qrops schemes delisted and still remain a player in the Qrops market.
Gibraltar and Malta, on the other hand, have the advantage of being part of the EU and so can take advantage of legislation which allows the free movement of pensions within EU states. Jurisdictions outside the EU have to satisfy certain extra conditions and so are felt to be at greater risk when it comes to HMRC interpretations.
Previously on the periphery of the Qrops market, their EU status has seen Malta and Gibraltar’s stature grow. Last autumn, Gibraltar’s government issued a statement saying that its pension fund administrators had received a written green light from HMRC to continue marketing Qrops to international savers opting to place their retirement savings in such an arrangement.
However, there is little doubt that any further abuse of Qrops products terms and conditions will see HMRC coming down hard.
As such, further changes cannot be ruled out entirely. For example, the recently published draft Finance Bill 2013 gave HMRC the ability to use legislation to take action against Qrops providers or jurisdictions where there is a mismatch between HMRC’s original intent for the law and practice.
This includes bringing into alignment the reporting requirements between current and former Qrops providers.
The changes mean that the Qrops market now offers a much more transparent and compliant marketplace, which is good for providers and their clients alike.
The ability to work or retire in locations of our choice, not limited by country of birth or occupation, remains an increasing option for many of our clients, which means there will always be a genuine need for flexible and transportable long term bona fide savings and retirement products.
Looking to the future, when compared with the alternatives, whether Qrops can continue to offer the right kind of benefits and advantages that meet the needs of the expatriate marketplace is something that advisers will have to keep a close eye on.
David Howell is chief executive of Guardian Wealth Management
How last year’s HMRC rules changed Qrops
- HMRC introduced a requirements for Qrops providers to treat non-residents and residents of a jurisdiction in the same way for tax purposes.
- The new rules imposed a requirement on Qrops to report all benefits paid out for 10 years from when a member joins a scheme, rather than for five years from the time client left the UK.
- A new requirement meant schemes had to report any member benefit payments to HMRC in writing within 90 days, rather than through annual electronic reporting.
- The rules continue to allow tax free lump sums as long as schemes ring-fence 70 per cent of the value of funds transferred into them for retirement income.
- Last April, HMRC cut at least 435 Qrops schemes from its new register.
- This was on top of the vast majority of Guernsey schemes which were cut due to the clamp down on schemes which treat residents differently from non-residents for tax purposes.