Be careful where you QROP - again
With HMRC issuing its latest legislative draft consultation guidance last week as part of its 2012 Finance Act, we now have a real and considerable move in the direction for control and interventionist regulation for Qualifying Recognised Overseas Pension Schemes.
This actually is in accordance with details in my original International Adviser article that highlighted the potential effects, as written in the Foot Report, on offshore jurisdictions. The article can be found here.
I wrote: “Michael Foot the ex FSA chairman produced a substantial white paper focused on the crown dependant offshore tax havens that have for so long tempted private investors to invest or indeed up sticks and reside there.
Foot’s paper suggests four key recommendations:
- Increased financial supervision and transparency
- Increased taxation to promote financial stability, sustainability and competition
- Pro-active financial crises management and resolution
- Increased international co-operation
In essence, Foot focuses on bringing these jurisdictions in line with the mainstream international community. Interestingly, this means tax information exchange agreements (TIEA’s) are already being adhered to and the possible introduction of withholding, value added, capital gains and corporation taxes. This is echoed with the forthcoming EU Code of Conduct group’s recommendations for zero-10 tax systems and compliance with any new tax directives given.
Indeed, the Isle of Man has already introduced withholding tax and TIEA’s are in force with a commitment to automatic exchange of information by July 2011. Guernsey and Jersey have TIEA’s and are also considering their positions on taxation related issues.”
We therefore see the HMRC proposing a clamp down on pension transfers by increasing the trustee-reporting period from non-resident five tax years to 10, and any distributions within the period fully reportable. Withholding tax introduced for third party QROPS jurisdictions (where the member lives in a different jurisdiction to their QROPS). Full notification of impending transfer by pension scheme administrators within 30 days of transfer, the use of 70% of funds for retirement income for ALL schemes, and schemes not registered for tax purposes in their country of residence will no longer be recognised.
The main issue of contention seems to be in what is labelled Condition 4 in the draft regulations that stipulates the fact that all holders of QROPS who are non-resident in the jurisdiction where their QROPS is held cannot benefit from any tax relief given if indeed this relief is not also given to residents of that jurisdiction. In other words, most jurisdictions will be caught by this new condition and this may well cause withholding tax at 20% to be charged on the fund.
Such drastic change would be detrimental to the intention of most clients who have transferred to a QROPS for all the right reasons. Indeed the Isle of Man and Guernsey, two of the most popular jurisdictions will be affected adversely if this is to remain. This can also be said to fly in the face of consumer protection regulation, which is now dominant in the UK.
There is no doubt that QROPS providers in jurisdictions affected by Condition 4 will now need to lobby hard together to ensure a fair outcome for clients.
Indeed there should be no finger pointing - at the end of the day it's the client’s interests that should be placed at the centre of this issue. We also have the fact that measures such as increasing the reporting period from five to 10 years, separate payments to members are now reportable within 60 days (not annually), and increased paperwork and evidence for transfer suitability means an increase in administration, which may lead to increased costs which will be passed onto the client.
Yet in an age of the discerning consumer and transparency and against a backdrop of unprecedented austerity, we now have firm evidence that the regulators will be true to their word and not entertain any flagrance or ‘undermining’ of the original rules and ensure transfers are made in the spirit and intention of UK pension legislation.
We also see a potential changing dynamic in choice of jurisdiction for QROPs where Malta for instance seems to be preferred by some as a true EU jurisdiction, and thus in compliance with not only UK but also offshore pension regulators.
Market participants must now ensure that all clients are and continue to be correctly advised on their pension objectives and indeed a well-advised, well-managed and compliant QROPS account is still a good option for those clients seeking more control over their pensions at retirement.
Furthermore, with other interventionist recommendations made, a re-read of the original Foot review is also well worth the time.
With the consultation period open on this draft regulation to 30 Jan, 2012, a meaningful debate is now needed to ensure the HMRC are fully aware of the good work that has been conducted by the industry post pension ‘A’ day, that the intention for advice on pension transfers is sound, and that this particular product is a good solution when applicable.
Chris Davies is the managing director of Enterprise Capital Management Ltd.