It’s ironic that a consultation intended to clarify the right to pension transfers should leave people scratching their heads, but we all know what can happen when you pull on a loose thread.
Such was the case with consultation outcome ‘Government response: The occupational and personal pension schemes (conditions for transfers) regulation 2021’.
It gives trustees and pension scheme managers the ability to stop or pause a transfer request if they identify ‘red’ and ‘amber’ flags.
Sensible, noble and long overdue.
But things start to unravel when you look at the wording – not just what is written, but what is not written.
Exemptions
Qualifying recognised overseas pension schemes (Qrops) formed a key part of the above consultation and response.
In March 2017, the UK government introduced a 25% overseas transfer charge (OTC) on retirement pots. There are carveouts, such as:
- Transfers to a jurisdiction in which the end client resides for at least five years: for example, an Australia Qrops for a Brit who is moving to Melbourne.
- If the transfer is within the confines of the European Economic Area (EEA): for example, a Malta Qrops for someone moving to Lichtenstein.
The consultation focused on what evidence should be required to prove that the end client actually resides in the country – be it Australia, Switzerland or any other eligible jurisdiction.
The document flits between the merits of mandating multiple documents to authenticate someone’s place of residence, versus unintentionally opening up avenues for scammers or creating a more complex and expensive system.
Ultimately, it concludes that “[…] the residency link will now align more closely with the exclusion from the OTC in section 244B of the Finance Act 2004”.
What about section C?
That is a simple enough statement – but one that potentially opens a can of worms, as Chris Lean, director at Aisa International, explains.
“Paragraph 60 of the DWP statement states that members that want to transfer to a Qrops will have to demonstrate their tax residency in the country in which the Qrops is established. The paragraph specifically refers to aligning closely with Section 244B of the Finance Act 2004. This section of the Act refers to Member and the Receiving Scheme being in the same country.
“The paragraph does not state that it aligns with Section 244C which refers to Member and Receiving Scheme in EEA States.
“Further, the guidance on the Pension Regulator’s own website for the ceding UK trustees states ‘[…] you must check that the member is tax resident in the same country that the receiving scheme is based’.”
International Adviser reached out to HM Revenue and Customs, where a spokesperson advised: “There has been no change in the OTC since outlined in March 2017.”
But Lean argues that the ambiguity in the wording is complicating matters and could stop legitimate transfers.
“How will ceding trustees interpret this when they receive transfer requests? While there are no obvious changes to the OTC rules, it all becomes irrelevant if a transfer is blocked in the first place.”
Clear as mud
Ambiguity is the breeding ground of scammers – and no friend to businesses and individuals working hard to remain on the right side of regulation.
The soaring cost of professional indemnity (PI) insurance and increased personal culpability under the senior managers and certification regime (SMCR) means that risk aversion isn’t just a hot topic for investors.
The cost of complaince means it’s easier, cheaper and safer for companies to say no.
Whether by error or design, HMRC has produced a document that makes it more difficult for businesses legitimately processing pension transfers to continue offering the service.
And there is still demand for Qrops. The taxman’s figures show that there were 3,000 transfers in 2020/21, down from 4,400 the previous year, although this is likely due to the pandemic.
Considering that the consultation and response were designed to ensure people retain the freedom to transfer their pension – it makes the situation incredibly ironic that it has also succeeded in making it more difficult.
