New Zealand is the jurisdiction of pension encashment, Malta is picking up increased business because of its European Union (EU) membership status, the Manx 50c product is gaining traction, and Guernsey is benefiting from strong business flows.
So while the proverbial cat has well and truly been thrown among the pigeons, with the issuing of the second draft of QROPS leg¬islation, there is absolutely no need for panic.
A clearer outcome
First, the new legislation has no adverse tax consequences for clients transferring their pensions to a QROPS, and importantly the post Q-day world will be simpler and clearer for all. This in itself should boost the industry, as reluctant clients and advisers will come to the party.
Yes, several jurisdictions do not currently meet the proposed qualifying criteria, and this means schemes from these jurisdictions may lose their QROPS status at midnight on 5 April, 2012. However, HM Revenue & Customs (HMRC) has given the guarantee that all members in these schemes are protected – as the transfer that led them to the QROPS will give rise to no tax and, provided that the schemes have been run in line with the rules, particularly in the first five years of non-UK residency, there should be no adverse tax implications. Hence clients are being protected.
In addition, during the consultation period regarding these changes, which ended on 31 Jan, affected jurisdictions and providers made their case to HMRC. At the time of writing, however, the view was that the changes would not be amended and would come into force on Q-day, with the most optimistic suggesting a small postponement to the enforcement of the new criteria.
Reality and circumspection are, however, ruling the day, and affected jurisdictions are addressing the proposed changes head-on, by looking to adapt their tax legislation accordingly. The big question is whether or not they will get them in on time, which from reports seems likely – particularly for Guernsey, which is by far the largest player in the market.
Clock is ticking
New legislation always leaves a period of time where the old legislation is still in play, and QROPS is no different. Hence, the time is now for clients and advisers who want to transfer schemes under the current rules and hence current practices, rather than the post Q-day rules which are not retrospective.
This may be particularly beneficial to clients who have been non-resident for a full five years, as the new reporting rules should not apply to them. Pension transfer is not a speedy business, however, and paperwork should be done as soon as possible, as there are just a few weeks left to make a transfer.
Guernsey
Of all jurisdictions, Guernsey has the most to lose as the market leader, measured in terms of pen-sion assets under administration. While it is neck-and-neck with New Zealand in terms of transfers, the primary reason for using New Zealand is encashment, so when the chips are down it is assets that drive revenues and provide jobs.
Hence, economics and politics will naturally favour Guernsey, in terms of evolving a suitable tax regime to ensure qualification with the tax recognition requirements and in particular Condition 4.
In terms of how this will be achieved, one only has to look to the enhancements of Condition 2, where significant detail and clarity has been provided by HMRC, which allows either tax relief or tax exemption to apply to a scheme. In other words, tax relief or tax exemption can be applied to contributions either going in or coming out of a scheme, but not both. Condition 4, the new condition, simply ensures that this treatment is applied consistently to the member irrespective of residence.
My guess is that this will lead to a new range of retirement saving vehicles from several jurisdictions in the months to come, but now it provides the necessary framework around which Guernsey can evolve its legislation.
Guernsey’s ability to evolve is probably best compared to the Galápagos Islands, as it has shown a tenacious capability to re-invent itself over the past decades. Speed, flexibility and creativity have always been the jurisdiction’s key strengths, and points of competitive differentiation over many other territories. This has not changed.
It is safe to say that Guernsey is working at an advanced stage in terms of adopting measures to ensure qualification post Q-day. Whether this will be achieved by the deadline only time will tell. But the likelihood of a positive outcome is high, which bodes well for the jurisdiction and those advisers that favour Guernsey product and provider support.
Q-day winners and losers
New Zealand
New Zealand is undoubtedly being put on the choke-chain. The embarrassment of Hong Kong, an ex-Commonwealth country, having its double taxation agreement (DTA) abused by UK residents holding QROPS, was clearly enough for the UK.
Strict carve-outs for New Zealand are the best outcome that New Zealand could have hoped for, when blacklisting and/or a re-write of domestic legislation excluding non-residents were clear options being considered, owing to pension abuse.
With the DTA abuse having been addressed, New Zealand schemes now have to provide an income for life, with 70% of the scheme’s value. This will see the majority of business being written in this jurisdiction fall away, and hence its prominence as the second-biggest QROPS market (it has a 27.5% share) is likely to fall.
However, its proximity to southeast Asia and a large domestic expat population, give it a geographical advantage over the European jurisdictions for this corner of the world. Only time will tell whether it can capitalise, or wants to capitalise, on this.
As for those advisers who were making a living out of pension encashment, they will see their trade stopped on Q-day.
This particular minority sector of the advice community has been at odds with the majority of advisers and HMRC since 2008, when pension encashment raised its two ugly heads in the shapes of Singapore and New Zealand.
The hydra will be truly dead on Q-day, and this has to be a significant boost for the QROPS industry. We could see transfer numbers increase, as the shroud of uncertainty is lifted from the QROPS landscape.
This amendment sends a clear message that DTA abuse is not to be tolerated, nor will HMRC allow bad practice to hide behind a DTA.
Malta
Malta’s position on the face of it remains unchanged, which places it at an advantage over other jurisdictions if they fail to meet the new qualifying conditions. The general opinion of providers in Malta is that its DTA and EU membership supersedes Condition 4.
From an EU legislative position, Malta clearly has a strong argument, but it is an argument that is unlikely to be had. This is simply because of the fact that Malta has not been used for pension encashment, as the lump sum payment is restricted to 30%. In addition, its low-tax environment and remittance tax basis is accepted within the EU, giving it an economic, political and legislative advantage.
Interestingly, Malta is not actually prescribed to meet the 70% rule either. This is because it qualifies as a QROPS jurisdiction by virtue of its full EU mem¬bership. Hence the jurisdiction has scope for significant innovation around pensions.
It would need to take care not to cross swords with HMRC, however, as the UK only has to comply with the EU requirement to allow transfer of pensions, but is well within its rights to claw back all tax reliefs at point of transfer, without breaching the EU directive on the freedom of movement of pension assets.
Malta is also ideally placed to take advantage of the broader cross-border EU pension transfer market, which the offshore British islands are not. This places Malta in an envious position, but the island has to develop capacity if it is to capitalise on this opportunity, which is much larger than just QROPS.
To put this into context, at the start of 2011, Malta only accounted for about 0.2% to 0.5% of the total QROPS market, placing it well behind the Isle of Man at 5.4%, or Guernsey at 31.5%.
Isle of Man
The Isle of Man is in a similar position to Guernsey, as Condition 4 excludes its 50c legislation. That said, the amendments needed to the Manx legislation are not as fundamental as Guernsey’s 157a regime, which theoretically provides a potential advantage.
Like Guernsey, the Isle of Man is working to provide a qualifying regime for Q-day. However, the scale of the QROPS business in the Isle of Man is significantly smaller than Guernsey, and hence QROPS is less of an economic contributor to the island as a whole. This could result in reduced political and economic imperative for change than in Guernsey.
The legislation under which Manx QROPS were written from 2006 to 2009, where a withholding tax was applied, could meet Condition 4. This provides the potential for many schemes to be unaffected on Q-day, irrespective of pending changes to new legislation, and depending on whether those schemes were or were not transferred to a 50c.
The Isle of Man should have proved itself as the key jurisdiction for QROPS, with its pension regula-tor, tax approval process, ombudsman, policyholder protection and well-established pensions industry. But it’s an unfortunate tale of external factors conspiring against the island, which have meant that the parts of the puzzle have just not aligned for this jurisdiction.
While it is envisaged that the Isle of Man will have a qualifying proposition, the race is on to meet the deadline of Q-day. Once the dust has settled, only time will tell as to whether the Isle of Man will or will not be able to compete with Guernsey and the new kid on the block, Malta.
Jersey
Enter the latecomer. Jersey has sat on the sidelines in anticipation of a shake-up, and has been preparing its legislation carefully. The current draft would seem to tick all the boxes and could prove to be the “better” legislation out there.
A new entrant with the credibility of Jersey also provides further evidence of the importance, scale and long-term nature of the international pension transfer market from a more global perspective, and that QROPS is simply the tip of a much bigger iceberg.
Late to the party
However, the island is late to the party and it will take time for product providers to develop products and go to market. In addition, distribution agreements and marketing partners will be hard won from battle-hardened jurisdictions and competitor product providers, who have far greater insight into “what makes it all tick”, given their time and insight in this market.
This means that Jersey will have a real fight against some veterans in this space and, while its pending legislation might be premium quality, the island’s ability to actually go to market through traditional channels could be significantly impeded.
That said, with the quantity of wealth management and bancassurance business in Jersey, and the number of expatriate client accounts held in the jurisdiction, this may just be the opportunity on which Jersey can capitalise and earn its seat at the table. The exact date on which Jersey will enter the market is not known. However a safe bet would be in the second half of the year, once the dust has settled from Q-day.
Summary
Singapore, Hong Kong and New Zealand have been beaten, and the way is cleared for a real explosion in legitimate QROPS business. HMRC’s provision of clarity around reporting, terminology and the interpretation of its rules leaves little room for misinterpretation, and should let the market mature, opening the gates for a strong growth phase in a certain environment.
In the short-term, some jurisdictions may not meet the qualifying criteria, but affected schemes and clients will not be penalised. Malta seems to be in pole position.
But with the practice laps not finished until midnight on 5 April, 2012, it’s still anyone’s race, with Guernsey and the Isle of Man working hard in the pits. Let’s not forget there is still a current set of rules that may prove beneficial for clients to transfer prior to Q-day. But the clock is ticking so, where appropriate, advisers and clients had better get a move on.
Rex Cowley is principal at Newdawn Consultancy & Research
