The general simplification of the pensions regime in 2006 led to the inception of QROPS with the aim of allowing those who are leaving the UK to take their pension savings with them to their new country of residence and enjoy an income in retirement there.
However, HMRC has become increasingly concerned that the system is being undermined, with QROPS being widely promoted as a means of turning pension savings into a tax-free lump sum or as a way of escaping taxation on pension saving.
The proposed legislation, which is part of the draft Finance Bill 2012, spells out a number of changes to the QROPS system, including revising the conditions which pension schemes have to meet to qualify and reducing their ability to offer tax advantages.
New requirements in the draft legislation include a signed acknowledgment from clients that they may be subject to tax charges if QROPS rules are breached, the passing of information from the UK scheme to HMRC relating to a transfer within 30 days of it taking place and reporting from overseas QROPS providers to HMRC on payments made from pension funds for 10 years from the date the pension is transferred overseas, rather than for five years from the time the client leaves the UK, as is the case now.
Specific legislation has also been proposed with regard to New Zealand, where there has been particular worry about the "cashing in" of pensions. New conditions will mean that generally, 70% of funds transferred to schemes in the country have "to be used to provide an income in retirement".
One of the more controversial amendments to the legislation is a clause that would tax non-resident QROPS members at the same rate as local residents.
Consultation on the draft regulations concludes on 30th January 2012, with changes due to come into force on 6th April. But, in my opinion, these changes are just the beginning and it is only a matter of time before stricter controls around the sale of QROPS are introduced.
From talking to specialist advisers operating in this market it is clear that there is genuine concern about the quality of advice being given, the qualifications of those giving the advice and the resultant risk posed to clients.
One IFA I spoke to recently summed up the worries of many in the industry when he told me: “A lot of people may well be transferring when the best advice is to stay put. Some will be moved into very highly charged and inappropriate investments and this will ultimately affect the money the clients have in retirement.”
The consensus from those I have spoken to is that the market needs to improve and professionalise and that IFAs selling these products should act now to future-proof their business and ensure suitable compliance precautions are in place, should the regulator come calling.
For clients that are intending to retire abroad, a QROPS product could be the right solution for them. But, like any pension arrangement, QROPS are long-term investments that require thorough research before recommendation.
An examination of data input by IFAs into the Selectapension QROPS comparison tool revealed that the average QROPS transfer was just over £205,000 – far from a trifling sum. But, up until now, advisers both in the UK and overseas have had to formulate their QROPS advice utilising very little in the way of supporting documentation. A combination of a lot of head scratching and mismatch of paperwork would eventually lead to a recommendation – far from best advice and unlikely to please the regulator.
The QROPS landscape is constantly shifting and those selling these products need to be aware that they could be sitting on a ticking time bomb. By acting now to ensure the sales process is clearly documented, IFAs can protect themselves and their QROPS clients both now and in the future.
Andy McCabe is managing director of Selectapension
