Tax Planning with QROPS in 2009 – The story so far

Qualifying Recognised Overseas Pension Schemes (QROPS) offer significant wealth protection and planning opportunities to those considering non UK residency or already resident abroad. Perhaps some of the few who have not taken advantage of QROPS are:

1. Those holding commercial property within their Pension. The transfer of such assets would attract foreign property landlord tax on any rental income as a QROPS will always be domiciled offshore.
2. Members of defined benefit occupational schemes with final salary index linked pensions such as MP’s and public sector workers (thankfully MP’s expenses are not pensionable) where the implied guarantees are too valuable.

Much debate on what can and can’t be done within a QROPS still abounds. HMRC has shown that it will deal with abuses of QROPS legislation. If the QROPS provider fails to adhere to the undertakings and reporting requirements HMRC will remove QROPS authorisation. 

If you decide that the current pension legislation on how much cash and income can be taken from some QROPS is suitable then:

• You are likely to be taking pension benefits post age 50 years old (55 years old from 6^th April 2010).
• You are taking a maximum 25% of fund as cash.
• The remaining funds are used to provide a lifetime income. Some QROPS providers adhere to Government Actuaries Department (GAD) rates.
• You will never have to buy an annuity.
• On death 100% distribution to intended beneficiaries.

A perfectly palatable planning solution but what if you want your QROPS to operate in a different manner?

What are the tax implications for deciding a different level of cash and income or even take the whole QROPS fund as a lump sum cash payment?

Starting with the UK legislation:-

HMRC refer to the Finance Act 2004 Schedule 34 which provides for charging provisions to apply in certain circumstances to members of non-UK pension schemes that are not registered pension schemes such as QROPS. 

This is necessary where overseas pension funds contain funds that have benefited from UK tax relief. Primarily looking at cases where a UK fund is transferred overseas (ie the ‘transfer members’ referred to in the legislation).  
There are numerous provisions that apply and the various charges are referred to as ‘member payment charges’.

The legislation specifically states in section 2:

‘…The member payment provisions do not apply in relation to a payment made (or treated by this Part as made) to or in respect of a relieved member or transfer member of a relevant non-UK scheme unless the member—

(a) is resident in the United Kingdom when the payment is made (or treated as made), or  
(b) although not resident in the United Kingdom at that time, has been resident in the United Kingdom earlier in the tax year in which the payment is made (or treated as made) or in any of the five tax years immediately preceding that tax year…’

The member payment provisions are defined as ‘…the provisions of this Part relating to payments made (or treated by this Part as made) to or in respect of a member of a registered pension scheme…’

The HMRC manuals also specifically state:

‘…the member payment charges apply only if:

• They are tax resident in the UK at the time the payment is made (or is treated as made), or
• Although not tax resident in the UK, they have been resident in the UK earlier in the tax year in which the payment is made (or is treated as made), or in any of the five tax years immediately preceding that tax year…’

Given that the member payment charges include

• the unauthorised payments charge,
• the unauthorised payments surcharge,
• the short service refund lump sum charge,
• the special lump sum death benefits charge.

It looks relatively clear that these are all subject to the residence requirement as above.

So after 5 complete UK tax years of non UK residency HMRC will not or more importantly cannot under current legislation impose any member payment charges if cash and income is taken beyond the rules afforded to a UK Pension.

What options are available from QROPS?

Globally there are multitudes of QROPS as can be seen by HMRC’s current QROPS list which runs into 32 pages and is growing each fortnight. This is a crucial point and awareness of why so many QROPS exist and the features and benefits of the legislation of each QROPS domicile are important. Large numbers of those listed are inaccessible to an individual member because they are:

• Occupational schemes of international employers.
• Individual and family QROPS.
• QROPS only available to individuals who become resident in that country such as some in Australia.

The other QROPS and particularly their domicile will be of interest. Research of international pension legislation, often called superannuation schemes, reveal there are many countries which have very different rules and regulations to the UK but have QROPS authorisation and allow non residents to transfer pension funds into their scheme. Most importantly their QROPS authorisation does not stipulate that 70% of the fund must be used to provide a lifetime income.

Some of these European and Worldwide QROPS can facilitate:

• Far greater levels of annual income than QROPS in jurisdictions which adopt and adhere to the UK GAD rates for imposing a lifetime income formula.
• The investment choice can be wider to include residential property.
• Access to the fund perhaps via simple fund loans can be achieved even before age 50 years old.
• The complete 100% release of funds to the member.

Avoiding HMRC member payment charges can be achieved after five complete UK tax years of non UK residency allowing individuals an even greater flexibility and complete control on how to use their accumulated pension fund. This should now be combined with detailed knowledge of Global QROPS solutions.

Undoubtedly this area of specialist planning will continue to be a revelation for non residents.

For more information contact:

• Gary Barlow Tel: +44 (0) 1884 250118 or contact us via email.