Transfer window for current QROPS rules closing on 5 April 2017
Anyone with clients who have emigrated and tried to take their pensions with them will know Qualifying Recognised Overseas Pension Schemes (QROPS) can be a tricky market, especially if they’ve been caught up in one of the sudden moves by HMRC relating to eligibility of schemes in the last couple of years. Most notable was the removal of all but one of the 1,500+ Australian schemes from its Recognised Overseas Pension Schemes (ROPS) list in July 2015. For those who had a client in the middle of transferring it would have been a thorny time with a lot of work being undone and revised advice needed.
On a smaller scale, but still notable, all but three of Canada’s 70+ schemes were removed from HMRC’s ROPS list only last November.
In the depths of his first (and last) Autumn Statement, Philip Hammond announced a number of changes to foreign pensions which will impact QROPS again. In what was largely a tidying-up exercise the changes that come into effect on 6 April 2017 include new QROPS eligibility criteria, so expect more modifications to HMRC’s ROPS list.
Broadly speaking the intention is to bring the taxation of foreign pensions into line with domestic pensions for UK residents, and to change the eligibility criteria for foreign schemes to qualify as overseas pension scheme and ROPS (and therefore QROPS) to be more consistent with UK pensions.
Under the current rules certain schemes use the ‘70% rule’ to qualify as an overseas pension scheme. This rule means that 70% of the fund must be used to provide an income for life.
Given the introduction of pension freedoms nearly two years ago (wow, that went quick), a rule that if you go abroad you need to use your pension for income, while those at home can blow it all on that now infamous Lamborghini, is inconsistent to say the least.
This rule is being removed which means non-occupational schemes that are established outside of the EU, Norway, Liechtenstein or Iceland in countries that do not have a regulator cannot use this as a way to qualify as a QROPS.
There are also changes to the ‘regulatory test’. In broad terms, if there is a regulator of the pension scheme, it must be regulated, if not but there is a regulator for providers, then the provider must be regulated.
The other main change relates to when you can access benefits. Current rules state that to qualify as a ROPS the scheme must only allow access to benefits from age 55, or if they are retiring due to ill-health. This is the rule that caused the withdrawal of approval for all the Australian schemes, as if certain hardship criteria are met Australian schemes can be accessed at any age.
UK pensions allow a variety of lump sums to be legitimately paid before age 55 – serious ill-health, short service refund, refund of excess contribution and winding-up lump sums. From April an overseas scheme permitting such payments will no longer automatically be excluded from being a QROPS.
The new rules come into force on 6 April 2017, so special care is needed for transfers that start the process but do not complete before tax year end. Even if the transfer is being made to a scheme that meets both the old rules and new, you may find the ceding scheme has to ask a few different questions if the transfer doesn’t complete by 5 April.
As we have seen, the goalposts for QROPS are constantly moving, so even if you have made a transfer to a scheme previously there is no guarantee that further transfers will be within the rules. The status of schemes can change and even HMRC’s ROPS list is heavily caveated, stating HMRC can’t guarantee schemes on the list are actually ROPS, and that transfers to them won’t be taxable.
HMRC have recently created a new page to help you keep up-to-date with the latest news; worth a check if you are considering a transfer to QROPS: here.
One final point to remember; a transfer to QROPS is tested against the lifetime allowance and any excess will always be charged at 25% as the funds are remaining in a pension.