Alas the summer has passed and it’s now time to take stock of QROPS developments in 2015. Things don’t stand still in life; the same can be said of the QROPS regime.
Since we last reported, there have been some significant changes imposed by HMRC on QROPS providers and the jurisdictions they operate from as follows:
- June 2015: HMRC confirms that Australian superannuation funds no longer meet the requirements to be considered as QROPS
- August 2015: UK Government moves to shut the QROPS public sector pension transfer loophole
1. The Australian dilemma
June witnessed a significant amount of activity with HMRC confirming that the QROPS list had been temporarily suspended in order to remove overseas schemes that do not meet the requirements of a QROPS. The list was suspended on 17 June, with HMRC sending a letter to all scheme providers asking them to confirm that their QROPS met the conditions of the ‘pensions age test’, which states that benefits can only be paid out of a scheme before the age of 55 in cases of ‘serious ill health’.
The wording of the HMRC announcement continued as follows: “If a scheme is not a QROPS then a transfer to that scheme will not be tax-free. You will need to satisfy yourself that the scheme you are transferring your UK pension to is a QROPS. As part of your checks you should always confirm with the manager of the scheme to which you want to transfer whether that scheme meets all of the requirements to be a Recognised Overseas Pension Scheme (ROPS).” In their statement, the revenue did not confirm whether illegitimate transfers will also be subject to an unauthorised payment charge; we are however expecting this to be the case
On the 1st of July, HMRC culled 3,137 QROPS from its approved list, with only 663 retaining their status. Australian was at the forefront of territories to have the majority of their registered QROPS delisted. The number of listed Australian schemes was reduced from 1,600 to one, leaving the local government superannuation scheme (which is solely open to local government employees) as the only one left remaining. Schemes in the Republic of Ireland also fared badly with the number listed dropping from 797 to 56, while Swiss schemes fell from 100 to one, Spanish ROPS from 16 to two, and South African schemes from 29 to seven.
The key point of contention in terms of the mass cull was the ‘pensions age test’ which came into force as of the 6th of April, 2015. It was ruled by HMRC that Australian superannuation funds do not meet this requirement given that they also permit the early payment of benefits in cases of ‘serious financial hardship’.
Until April, transfers from UK pension funds to Australian based QROPS have occurred without a tax penalty. Under the new rules such transfers can no longer occur. A legal representative of the Australian regulated superannuation funds did however write to HMRC requesting an exemption under the ‘pensions age test’ requirements.
Since the beginning of September it would appear that many of the offending jurisdictions have amended their rules in order to comply with HMRC requirements. Four new Australian superannuation schemes have now been added to the list. South Africa and Spain have also been successful in increasing the number of QROPS on the HMRC list.
With circa 1.3m UK expatriates currently living in Australia and an estimated 43,000 new people emigrating there from Britain each year, it was important for a solution to be found in order to allow individuals to transfer their UK pensions where appropriate. These new developments offer individuals some degree of choice in terms of where they can transfer their pension; the number of schemes is expected to increase as discussions progress.
2. The QROPS public sector loophole
The financial services industry has had some time to digest the UK pension reforms of April 2015. It now transpires that the initial banning of public sector pension transfers into QROPS did not extend to QROPS schemes that cater for non occupational pensions and which have their main administration in a state in the European Economic Area. Unfunded public sector schemes such as the UK Teachers’ Pension scheme had advised those members wishing to transfer their pension overseas of the loophole in the legislation. In order to close this loophole, the Government released Statutory Instrument 2015 No. 1614 in mid-August.
The amended legislation confirmed that: “the Regulations prevent transfers from an unfunded public service defined benefits scheme to a qualifying recognised overseas pension scheme which can provide flexible benefits as a result of the transfer, including those based in the European Economic Area.”
There are always going to be loopholes in any system which need to be addressed over time. In this case the window of opportunity was that overseas transfers of unfunded public sector schemes would be allowed if the QROPS was administered in the EEA. The UK Treasury has thus moved to close access to such transfers.
The QROPS regime continues to evolve.