Cream of the QROPS

For those advising offshore clients, and those who may become offshore clients, the Finance Act 2004 introduced a key pension planning tool. The new pensions vehicle was the Qualifying Recognised Overseas Pension Scheme, now simply known as QROPS. The scheme came into being on 6 April 2006 '“ better known to some as 'A-day' '“ along with the new pensions simplification regime for the UK generally. QROPSs have been marketed particularly at those retiring abroad, and that is clearly how HMRC sees them being used, but, depending on circumstances, QROPSs may have wider application in tax planning.

In summary, the overall scheme provided a simpler system where benefits built up within the UK registered pension scheme regime (including occupational or private pension arrangements) could be transferred to an overseas pension arrangement. Before April 2006, transfers to overseas schemes were possible, but the process had been more restrictive and more complex to implement. QROPS started rather slowly after 6 April 2006, but since then significant numbers of QROPSs have been established in a wide range of jurisdictions.

Crucial checks

For those not familiar with QROPS (and who have no wish to become familiar with their detailed complexities) there are some basic pointers. First, it is important to check that any overseas scheme to which a client intends to transfer benefits from a UK-registered pension scheme really is a QROPS. The first check should be with HMRC's website, where a regularly updated list of QROPSs will be found. If a QROPS is not shown on HMRC's website, checks should be made with the QROPS manager to obtain proof of QROPS status.

Checks are critical, since a transfer to a QROPS is recognised by HMRC, and recognition is important as it impacts on how a transfer from a UK-registered scheme is treated for tax purposes. A transfer to an arrangement that is not a QROPS will not be a recognised transfer, and could end up being treated as an unauthorised payment. Unauthorised payments have some very unwelcome tax consequences, including a basic 40 per cent tax charge on the amount transferred, as well as separate scheme sanction charges and member payment surcharges.

A check on the status of the QROPS in its 'home' jurisdiction should also be undertaken, although some QROPS providers offer this either on their websites or as part of their package of documents. For those who wish to gain a more detailed insight into QROPS, the extensive guidance provided by HMRC in its Registered Pension Scheme Manual (Technical) at RPSM 13 and RPSM 14 is a good starting place.

A glance at the list of QROPSs published on the HMRC website shows the now substantial number of QROPSs and the jurisdictions in which they have been established. Certain jurisdictions have become something of front-runners in the provision of QROPS. Guernsey, for example, has a significant number of specialist QROPS providers and has become a jurisdiction of choice for many. More recently, Malta and Gibraltar have developed and offered their own QROPS arrangements. Some other jurisdictions, such as New Zealand, have emerged with some interesting QROPS products. It is beyond the scope of this article to consider the features of QROPSs within the various jurisdictions, but it is critical that independent financial advice is obtained, and then, it is suggested, only from those specialising in QROPSs.

Choosing a QROPS

The selected QROPS will be chosen having regard, among other things, to the tax and pension benefits regime of the QROPS itself, the jurisdiction in which the client will reside and the jurisdiction in which benefits payable from a QROPS will be received. The benefits that will be paid from the QROPS will be subject to the pensions regime in the jurisdiction in which the QROPS is established, and it is clear that, depending on the QROPS jurisdiction, this may present significant advantages to a member, for example, the scope to avoid having to purchase an annuity, the favourable tax treatment of any pension benefits paid out by the QROPS and the payment to beneficiaries of benefits on death of the QROPS member.

A key feature that will crop up in advice given regarding QROPSs is the five-year threshold. Broadly, until a member has been non-UK resident for five complete tax years, payments from a QROPS will remain reportable to HMRC and be subject to the UK pensions tax regime. Care must also be taken in tax planning if there is any likelihood that the member may return to UK-residence status, since the UK tax regime may then be deemed to re-apply to payments made from the QROPS.

Early in their development, there were some rather ambitious claims made by some QROPS providers, particularly regarding so-called 'pension liberation' (where transfers were made and the pension then immediately cashed in) and others regarding investments. However, following focus from HMRC '“ including where HMRC has reached specific agreements with the regulating authorities in some of the jurisdictions in which QROPSs have been established '“ inappropriate examples of such practices now seem largely to have fallen away. HMRC has shown that it will enforce its QROPS requirements '“ for example, it withdrew recognition from schemes in one jurisdiction, and it has imposed tax charges on members where an unauthorised payment has been made.

A more recent development relating to QROPS stemmed from further regulations (and subsequent guidance issued by HMRC) on the subject of investment regulated pension schemes, and particularly how (at least so far as HMRC is concerned) the reporting requirements imposed on the manager of a QROPS are to be applied. An investment-regulated pension scheme, in summary, is a scheme where the member can directly or indirectly influence the way that assets are invested. Since many UK-registered schemes set up as self-invested personal pensions schemes allowed member direction (within the HMRC constraints) and that many transfers to a QROPS were from this type of scheme, many QROPSs also provided a facility for some form of member-directed investment. As noted above, the position was that the reporting requirements broadly fell away after five full years of non-residence. For QROPSs which are investment-regulated schemes, the position was made more complex because even if payments are made after the five complete tax-years period, there is a concern that if those payments are made from a QROPS which is an investment regulated scheme, then the obligation to report payments made from that QROPS may continue even beyond the five complete tax-years period. The detail behind this peculiarity is extensive, and it is fair to say that there are some differing views, but the broad point is that when deciding whether to transfer to a QROPS, consideration may need to be given to whether the scheme is or is not an investment-regulated scheme to which continued reporting obligations may apply.

Pension schemes in the future

QROPSs may have assumed an additional significance in the context of the recent ruling in the Gaines-Cooper matter ([2010] EWCA Civ 83), and particularly in relation to the extent to which a continued UK-registered pension scheme may or may not be a factor that HMRC might take into account for determining continued connections to the UK for residence and related purposes. Clearly, it is possible that a UK-registered pension scheme from which the client is or may later benefit, could represent a substantial UK-based asset. As part of a strategy dealing with continued connections with the UK, it may be that careful consideration will be given to whether a transfer of benefits under a UK-registered scheme to a QROPS would be appropriate.

With the upcoming restrictions to pensions tax relief for higher earners, consideration is increasingly being given to alternative pension-related savings arrangements. The upcoming higher rate tax may also have a bearing on the value clients place on existing tax-advantaged pension saving within the registered scheme regime. An area of particular focus is Employer Financed Retirement Benefits Schemes. These arrangements are not within the UK-registered pension scheme regime, and so while not benefitting from the same tax reliefs applying to registered schemes, they do have the advantage of providing a significant degree of flexibility for an employer to structure retirement benefits for employees without the main constraints which would apply to a registered pension scheme.

There may also be scope to utilise yet another type of recent arrangement, the Qualifying Non UK Pension Scheme (and so introducing yet another acronym 'QNUKPS' '“ not to be confused with QROPS) as a vehicle to receive non-tax relieved contributions, but with the advantage of few restrictions on the benefits paid from it. The original aim of the regulations dealing with QNUKPS was actually to clarify the IHT position for qualifying overseas schemes (including QROPS).

As always, the correct mix of arrangements (whether registered or non-registered, onshore or offshore) will depend on the particular circumstances of the client. What is clear though is that the menu of arrangements available to meet the client's needs continues to develop.