Moving money offshore has just become harder as the UK tax authorities rein in the use of offshore pension schemes
The market for offshore pension planning in the UK has been thrown into upheaval following a crackdown by HM Revenue & Customs (HMRC) on the way offshore pension schemes can be used.
The changes are having a particular impact on two of the four major offshore centres, Guernsey and the Isle of Man, which have become the dominant players in the offshore pensions market.
In 2011, HMRC raised concerns about the way that some schemes were being used, and announced that it would be reviewing the rules that govern qualifying recognised overseas pension schemes (Qrops) – pension schemes authorised to receive transfers out of UK pension schemes.
These new rules were published alongside the Budget on 21 March this year and were followed by the publication on 12 April of an updated list of Qrops. Both the new rules and the list of new schemes are more restrictive than had been expected.
In addition to these pension schemes not being used for their intended purposes, it is suggested HMRC and the FSA are also concerned about some firms using Qrops to tempt people to ’unlock’ the assets held within their pension schemes by transferring to a Qrops to get access to their savings before retirement, as well as by the quality of advice that potential Qrops customers are receiving.
“This is the beginning of a clean-up campaign,” says Geraint Davies, chief executive of international financial advisers Montfort International. “HMRC has really had enough of people taking the mick out of consumers. There’s been a proliferation of businesses marketing themselves as Qrops experts and primarily marketing the ability to take cash out of pension funds.”
Top of the Qrops
The Qrops regime was introduced in 2006 to allow UK expats or non-UK residents who had built up pension benefits in UK schemes to transfer their benefits to another country if they left the UK.
The size of the market is fairly modest at present. In 2010 it was worth £471m and one recent estimate from Guernsey-based Qrops provider Close International put the size of total assets transferred into Qrops since 2006 at £1.3bn. But with more than five million UK expats and more than one million overseas residents in the UK, the market could be much bigger.
However, HMRC had become concerned that the rules were being abused. When it announced its reforms in December 2011, HMRC said it was introducing more intrusive reporting and beefing up its oversight powers.
HMRC said: “This will ensure that the system continues to be used for its intended purpose of allowing individuals who intend to leave the UK permanently to take their pension savings with them, free of UK tax, to their new country of residence in order to continue saving to provide an income in their retirement.”
The advantages of transferring into a Qrops can be considerable. Qrops allow members of UK registered pension schemes to transfer their benefits to a pension scheme in another country and then to draw their benefits under the tax laws that apply in the jurisdiction where the new scheme is registered.
Income from a UK-registered pension scheme is subject to UK rates of income tax, but since many offshore centres have lower rates or no income tax at all, pensioners who move overseas will enjoy a considerable advantage over pensioners whose benefits are paid out of a UK scheme.
In addition, UK pension schemes limit the amount of money that can be taken as a lump sum free of tax at the point of retirement to 25 per cent, but some territories allow pension scheme members to take out much more.
This ability to arbitrage different taxation systems has left Qrops open to potential abuse and this, alongside concerns about the quality of advice surrounding pension transfers, is what HMRC is trying to crack down on.
“There are a number of new kids on the block who just want to sell as many Qrops as possible,” says Davies. “There has been a proliferation of ’specialist Qrops firms’ and HMRC has had to do something as 95 per cent of these transfers won’t have been in the best interests of the customer.”
One area that has come under particular scrutiny is the third-country Qrops market, where pensions are transferred from the UK to an offshore jurisdiction but the benefits are then paid to the beneficiary in a different country. To curb this practice, HMRC has introduced new rules to insist that any Qrops must apply the same tax rules to benefits paid to non-resident scheme members as apply to members who are resident in the jurisdiction that the scheme is registered in.
HMRC has also introduced a requirement for 70 per cent of scheme assets to be retained to provide an income in retirement, to prevent pension unlocking.
The new rules have also given HMRC much greater powers to delist individual Qrops if they feel schemes are flouting the rules. Up to this year, all Qrops have had to inform HMRC of all payments made by the scheme to members in the previous five years but it has now extended the reporting period to 10 years, meaning it now has the power to close any scheme set up since 2006 to new business if it feels it has broken the rules.
The revised rules that were published in March went further than many expected and are having a significant impact on Guernsey and the Isle of Man, the two largest centres of the third-country Qrops market. The changes could also have a big impact on Jersey and Gibraltar’s ambitions of expanding into the Qrops market.
Guernsey is perhaps the jurisdiction most affected by the new rules. In the first six months of 2011 Guernsey accounted for 32 per cent of all Qrops pension transfers but the number of approved schemes on the HMRC list published on 12 April was reduced from 313 to just three.
The States of Guernsey, the island’s parliament, had taken pre-emptive measures to try to ensure the island’s Qrops remained compliant with HMRC’s new requirements. The island introduced an amendment to the Income Tax (Guernsey) Law 1975 to create new pension rules called section 157E schemes. This new amendment was passed in March to introduce equal tax rules for resident and non-resident scheme members. However, these new schemes have been rejected by HMRC along with most of the pre-existing schemes.
Fiona Le Poidevin, deputy chief executive of Guernsey Finance, accused HMRC of an “unjust attack” on the island’s Qrops business, saying that while almost all Qrops schemes – including schemes just for island residents – have been removed from HMRC’s list, third-country Qrops operating out of other jurisdictions have been left almost unchanged.
“What we’ve determined from the publication of the new list is that, in broad terms, it’s Guernsey that has been singled out by HMRC,” says Le Poidevin. “It’s confusing and frustrating that HMRC has now delisted almost all Guernsey schemes while most of those from other jurisdictions remain listed as Qrops.”
Isle of Man
The Isle of Man is one of the main centres of third-country Qrops but has been left relatively unscathed so far by the changes in regulation.
Prior to 21 March 2012, there were three types of Qrops pension scheme operating in the territory: those set up under the Income Tax (Retirement Benefits Schemes) Act 1978; those set up under Part I of the Income Tax Act 1989; and those established under section 50C of the Income Tax Act 1970.
The new Qrops rules mean that 50C schemes are no longer compliant and a small number of schemes have been removed from the current HMRC Qrops list.
“The UK has made it clear that it wishes a Qrops to be broadly similar to a UK-registered pension scheme,” says Isle of Man Treasury Minister Eddie Teare.
“Although I’m disappointed that our 50C schemes can no longer be Qrops, the Isle of Man retains a powerful international pension management offering through having both occupational and personal pension schemes that can be approved as Qrops.”
Jersey’s current pension rules only allow the transfer in of pension benefits for Jersey residents, seemingly ruling it out of the third-country Qrops market.
However, it has previously stated its intention of moving into this market and in early April Treasury and Resources Jersey, the island’s treasury department, announced that it was introducing legislation to the island’s parliament to allow schemes to hold the benefits of non-residents in an attempt to establish a foothold in the market that Guernsey had successfully built up.
These plans have now been placed on hold while the island’s authorities pick through the implications of the crackdown on Guernsey’s Qrops business.
Along with Jersey, Gibraltar has been eyeing up the Qrops market to see if it can re-establish itself in a market it effectively withdrew from in 2009 following a different tax dispute with HMRC about the level of income tax levied on pensions paid out of schemes registered in the territory.
Last December saw a new Government elected in Gibraltar and new minister for financial services Gilbert Licudi has said he is taking advice on the drafting of regulation with the intention of introducing it soon.
All four offshore centres are having to adopt a wait and see approach while further clarification is produced by HMRC. But Le Poidevin warns that if HMRC closes down the third-country Qrops market in well regulated offshore jurisdictions closer to home, not only will it lead to job losses but the business will simply move to harder-to-reach jurisdictions.
“If this situation isn’t rectified quickly and Guernsey schemes aren’t listed as Qrops, then we could see business moving to more remote jurisdictions and, with that, the monies from Qrops in the island that currently flow back into the City of London may also be lost, which surely can’t be what HMRC is intending,” she argues.
But Davies says that far from being singled out, Guernsey’s pre-emptive legislation has simply made it the easiest target for scrutiny from HMRC.
“Guernsey put its head above the parapet and HMRC was able to have a good look and didn’t like what it saw,” he says. “Other schemes haven’t stuck their heads above the parapet but HMRC is going to have some serious questions about some other schemes in some other jurisdictions around the world.”
Gregor Watt is features editor of Money Marketing