The legislation was published by the UK Government yesterday as part of its draft Finance Bill 2012. While the QROPS industry had anticipated a strengthening of certain aspects of the regulations, which were originally introduced as part of the so-called “A-day” regulations in April 2006, such large changes were not.
In its opening remarks, HMRC said the new measures are intended to strengthen the tax provisions within the existing laws and to ensure pension “savings are used to provide an income in retirement as intended when the regime was introduced in 2006.”
One of the biggest changes is the introduction of “Primary Condition 4” to Form APSS251 – the form used by providers to register their QROPS with HMRC. The new condition, which, according to the explanatory notes within the draft regulations is a mandatory condition, stipulates:
“Where an exemption from tax in respect of benefits paid from the scheme is available to a member of the scheme who is not resident in the country or territory in which the scheme is established, the exemption must—
(a) also be available to members of the scheme who are resident in the country or territory; and
(b) apply regardless of whether the member was resident in the country or territory—
(i) when the member joined the scheme; or
(ii) for any period of time when they were a member of the scheme.
For the purposes of this condition “exemption” means any exemption available under the system of taxation of personal income in the country or territory in which the scheme is established other than an exemption which applies by virtue of double taxation arrangements.”
This legislation will mean a QROPS will have to offer exactly the same tax regime to its members as to those resident in the country in which the QROPS is domiciled. According to some experts, this could cause significant problems for some jurisdictions.
Financial adviser Paul Davies, director of Global QROPS, said QROPS domiciled in Guernsey, as the legislation stands at the moment, are likely to struggle to meet the new condition, as the jurisdiction’s internal tax rules do not currently comply.
“This rule will cause problems for Guernsey,” said Davies. “Other jurisdictions should largely be okay but, unless Guernsey can successfully lobby against the changes, or change their internal tax rules, there could be problems.”
Taking a slightly different approach, Rex Cowley, QROPS expert and principal of research and consultancy firm, New Dawn, said: “It is clear more thought has to go into Condition Four which has the potential for excluding many expats from pension transfer, which is their legal right, given incompatibilities between the UK in the members’ country of residence.”
Another significant proposal, is to replace the reporting requirements for QROPS from the current five year non-resident rule with a more stringent ten-year reporting requirement. As well as increasing the length of time of the reporting requirement, the new legislation proposes changing the start date to the date the pension transfer took place, rather than the date the member leaves the UK, as is currently the case.
This rule is unlikely to cause serious problems for the industry, but will increase the administrative burden on it. It is also likely to create significantly more work for HMRC which will have to monitor the QROPS reporting.
In addition to the above changes, HMRC has also introduced a requirement that all schemes provide an income of at least 70% for life – as intended by UK pension legislation generally – and removed the opportunity for people to “pension bust”.
The draft rules state: “Similarly pension schemes established in New Zealand have been used to allow individuals to take their pension savings as a lump sum. Regulations 4 to 6 amend the conditions so that 70% of the funds transferred to certain pension schemes in New Zealand have to be used to provide an income in retirement.”
The introduction of this rule has been specifically targeted at New Zealand schemes where the full withdrawal of a pension, tax free, was permitted. As of 6 April 2012 this will no longer be permissible.
Stephen Ward of Premier Pension Solutions, which specializes in QROPS transfers to New Zealand, said despite this rule targeting the jurisdiction, the regulations are not necessarily bad news overall for New Zealand.
He said: “Ironically New Zealand pension schemes satisfy Condition Four as there is no tax relief on pension contributions made by local residents, the fund is taxed, and there is no tax on benefits when paid out. No tax applies either on benefits made to non residents of New Zealand so “there is exemption from tax for non-resident members and it also applies to resident members”.
Meanwhile Davies added: “I believe HMRC had one main remit and that was to stop people taking their pension out of the UK and then taking it all as a pension lump sum. But by introducing the ten year reporting period rule, making it so schemes have to have 70% income for life as well as the new tax rules, HMRC have probably caught more schemes in the net than they thought they would.”
