Nothing seems to stand still in the world of UK pension legislation. The new flexible pension regime announced in the 2014 Budget has had a ‘knock-on’ effect on another area of the UK pension industry i.e. Qualifying Recognised Overseas Pension Schemes otherwise known as QROPS.
There are an estimated 5.5 million British people living overseas. This equates to almost one in ten of the UK population. It is important therefore that any change in domestic legislation does not have a negative impact on the retirement planning of those living overseas.
By the same token it is also important that foreign nationals who have worked and paid tax in the UK are allowed to transfer their UK pension savings to a pension scheme established in another country, on the provision that the overseas pension scheme meet certain conditions outlined by HMRC. Pension transfers can be made free of UK tax (where the transfer is subject only to a charge on any funds above the lifetime allowance, currently £1.25 million.)
A draft Statutory Instrument published by HMRC on 19th December 2014 recognises the need to align the treatment of members of UK registered schemes with those of overseas schemes. The objective is for the QROPS regime to be consistent with that of UK pension legislation.
The latest developments in QROPS legislation include the following:
- The allowance of up to 100% lump sum withdrawals from QROPS. Previously, the QROPS rules stipulated that overseas schemes should mirror those in the UK in that at least 70% of tax relieved funds must be used to provide the individual with an income for life. As of April 2015 when pension flexibility takes effect, this requirement will be removed.
- Unless a scheme is regulated or established in the European Economic Area, it will only meet the conditions to be recognised as an overseas pension scheme if the pension provider is authorised to provide pensions business in the scheme’s country of establishment.
- All QROPS will have to ensure that pension benefits from the transferred funds are payable no earlier than they would be under the rules of a UK registered pension scheme i.e. benefits cannot be accessed before the individuals 55th birthday.
- There is a new requirement for registered QROPS to report information to HMRC about individual members when they take withdrawals from their scheme within 91 days of the transfer being made. The aim is to monitor withdrawals and ensure that members do not enjoy excess tax relief when accessing their pension rights.
It will be interesting to see how existing QROPS jurisdictions respond to these new developments. Some jurisdictions already comply with the above requirements; others will have to amend their legislation in order to offer a flexible benefit structure in line with that of the UK. Both Gibraltar and Malta have taken steps to amend their pension rules to facilitate the new freedoms.
It is important to examine what the market needs in order to achieve good outcomes. As such, the draft Statutory Instrument was subject to a four week consultation period with the finance industry, which ended on 16th January. It is now up to the policymakers to instill confidence in the QROPS market by having the necessary checks and balances in place so as to create an even playing field. We will keep you informed of the progress of this new pension legislation as it takes shape.