In its explanatory memorandum to statutory instrument 673 of 2015, HM Revenue & Customs said the “70% rule” will remain “temporarily” after April’s pension reforms, backtracking on its previous proposals to introduce full-flexibility on withdrawals from the schemes.
It said: “This is so that, in the light of subsequent events, the legislation to replace the 70% rule can be targeted more precisely to ensure that the principles behind allowing transfer to be made free of UK tax can operate as Parliament intended.”
However, the notice, issued on Friday, gave no indication as to how long this requirement will remain.
The explanatory memorandum was released last Friday and followed a four week consultation into draft statutory instrument 673, released in December last year, which proposed removing the “70% rule” on QROPS to allow 100% withdrawals from 6 April this year, in line with the removal of the requirement for an annuity on UK pensions.
Volte-face
Roger Berry, managing director at Guernsey-based QROPS company Concept Group, accused HMRC of a sudden “volte-face”, leaving QROPS providers with little time to act.
“How can members and their advisers plan their affairs with any certainty under these circumstances? The draft legislation extending flexibility, although late in being released, at least aligned overseas schemes with the UK come April 2015,” he said.
“In fact ‘aligned’ was the word HMRC used to explain their then draft policy. To suddenly do a volte-face with less than a month to go adds increasing evidence to those who feel this is ‘policy on the hoof’.
“Let’s all hope temporary is very temporary.”
Similarly, Sam Instone, chief executive of AES International, said: “This Instrument is a U-turn compared with the draft which was issued in December 2014 and which was going to enable overseas schemes to be allowed to offer flexible benefits in exactly the same way that the new UK pensions legislation permits.
“This development potentially damages the QROPS market, at least for the time being, placing SIPPs undoubtedly in the forefront.”
Hold back
Paul Davies, director at Global QROPS, said jurisdictions which have looked at altering their local legislation to accomodate HMRC’s announcement of full flexibility will now have to wait for HMRC to decide whether or not it will remove the “70% rule” before seeing benefits from legislative changes.
“I think HMRC is concerned that it will potentially miss out on a lot of revenue and has decided to wait before introducing full flexibility,” he said. “I do not think is the right way of going about it.”
“However, I don’t think we can see fully flexible UK pensions exist alongside less flexible overseas pensions forever, and ultimately I believe they will remove the “70% rule”. They are certainly having a review into it.”
Election worries
Mark Sanderson, chief operating officer at Brooklands Pension, said HMRC’s removal of the amendment to the “70% rule” means that nothing will change with current QROPS rules except that they will now have to apply a minimum retirement age of 55 from 6th April 2015, as also required in HMRC’s proposals.
However, he said there is a concern that its “temporary” move will potentially leave the “70% rule” unchanged for a long time, in light of the upcoming UK election.
“There is no question that HMRC still support full flexibility in pension schemes and this will still apply to UK registered pension schemes like SIPPs from 6 April,” he said. “It is apparent, however, that HMRC have grown increasingly concerned over the commoditisation of the QROPS market.
“There is a lot of pension transfer activity taking place in the lead up to 6 April, and if clients are looking to take advantage of the new flexibilities then UK registered pension schemes like SIPPs are still a good option.
“However, they should be wary before making a transfer to QROPS that the scheme they are transferring to may not allow the same flexibilities as a UK registered pension scheme, especially in the short term.
Unusual
Gary Boal, managing director at QROPS provider Boal & Co, said: “From the explanatory memorandum, it seems clear that flexi-access is still planned for QROPS, and that the current ‘70% rule’ remains temporarily. It is right that HMRC take the necessary time to ensure that the flexi access changes are introduced correctly.
“Flexi-access is not something one would expect a typical QROPS member to contemplate. The tax consequences, and a high marginal tax rate, would be horrendous in most countries,” he added.
“The tax rates and the tax figures are too high to contemplate, and taking a pension pot as a lump sum would be ill-advised.”
