The UK authorities continue to act against the exploitation of rules involving what are called Qualified Recognised Overseas Pensions Schemes. This article examines some of the issues involved.

Qualifying Recognised Overseas Pension Schemes, or QROPS, are back in the news again. The UK’s HM Revenue & Customs has removed a number of foreign schemes from those deemed to be acceptable for this particular structure. The existence of QROPS reflects how many wealthy persons – and even those who are not particularly well-off – wish to have pensions runs across national borders. In this article, Jason Porter, director of Blevins Franks, a firm advising UK expats, examines latest developments around QROPS. As always, the editors of this news service urge readers who want to share their views on these matters to get in touch, at tom.burroughes@wealthbriefing.com

Qualifying Recognised Overseas Pensions Schemes (QROPS) was the UK’s legislative response to an EU Directive on the free movement of pension capital across European national boundaries.  It was introduced as part of pension simplification in April 2006, commonly known as pension “A” day.

Many jurisdictions and pension scheme providers jumped on the bandwagon of what appeared to be a new, enlightened period for internationally mobile persons, and their pension schemes.

Nine years later, much has changed. HM Revenue & Customs (HMRC) have always been concerned over exploitation of the rules to take advantage of more lenient pension arrangements in other countries. They have almost annually taken furious and frantic action against what they see as “abuses” of the system.

We have seen the removal of schemes from the Caribbean Islands, Bangladesh, India, Malaysia, Hong Kong, Cyprus and Slovakia, but even more worrying was the wholesale de-listing of over 200 schemes in Singapore in 2008, and over 300 in Guernsey in 2012 (of 735 delisted in that year); two offshore jurisdictions traditionally seen as technically able, with strong governance and conservative management.

In the case of Singapore this led to a UK court case against HMRC, ending in 2013.  HMRC not only lost the case, but had to withdraw assessments of penalties of between 55 per cent and 75 per cent of the value of the funds, and pay the costs of the injured parties.  In addition, the judge described HMRC’s conduct as "shameful and aggressive".

More importantly, this case established a precedent, and a fundamental tenet of QROPS, that an individual will retain a qualifying overseas pension scheme even if it has been delisted, if their transfer into the scheme took place prior to the delisting. 
Since 2006, we have also seen a barrage of legislation and an ever increasing compliance headache for providers and members alike.  Even prior to the changes in 2014-15 the principal regulations in SI 2006/206 had been amended five times.

Recently, a legal request letter dated 17 April 2015 (but effective 5 April 2015), to all global QROPS providers from HMRC, asked that each provider satisfies itself that it meets the Recognised Overseas Pension Scheme (ROPS) rules. Specifically it asks three questions:

1.    Does the scheme satisfy the ROPS conditions?
2.    Does the scheme meet the minimum age test (age 55)?
3.    Does the scheme want to appear on the public list of ROPS?

The new pension freedoms initially gave the impression that one of the older requirements, where the QROP should provide a ring-fenced pension representing at least 70% of the funds transferred (so a maximum tax-free lump sum of 30 per cent of the fund), would be removed. But, rather than be allowed the ability to receive 100 per cent of the pension fund as a lump sum, HMRC confirmed that non-EU QROPS must continue to temporarily apply the 70 per cent income for life rule.

All expatriates with pension savings, which have benefitted from UK tax relief but are held in overseas schemes, have effectively been excluded from accessing their fund since April.

HMRC has said it is working on a replacement for the rule, to ensure that the tax to be applied by different QROPS jurisdictions does not disproportionately encourage withdrawals.

This new regulation is causing pain and financial hardship in some countries because their schemes are based on local rules that allow payments in excess of 30 per cent and/or to younger retirement savers in certain circumstances.  These include some of the most popular QROPS centres, such as Australia, Ireland and New Zealand, who together comprised 63 per cent of the global QROPS market at the time.

The current imbalance between EU and non-EU QROP jurisdictions has inevitably been exploited, with Malta the first EU QROPS jurisdiction to change its rules on 15 January 2015 allowing providers to follow UK rules. 

Gibraltar, as a member of the EU for financial services followed Malta’s lead in adapting to the UK’s new pension freedoms. With its proximity to Spain and Portugal, it may see an influx of UK expatriate pension holders who have chosen these countries as retirement locations.

But over the past few months, even these jurisdictions have not been feeling entirely comfortable.  HMRC recently announced that from 17 June 2015 the list of ROPS notifications has been temporarily suspended, and will not be available again until 1 July 2015.  At this point it is expected to look “significantly different” when reissued.

Malta itself is not entirely out of the woods, with benefits available on local schemes at 50 years of age.

History presents us with an interesting precedent; the only time HMRC previously suspended the entire ROPS list, as opposed to individual schemes, was in April 2012 when over 300 Guernsey schemes were removed, and there are high expectations for the demise of Australia and New Zealand.

It is clear that by introducing the current pension freedoms the UK government and HMRC have to realise the genie they have been trying to contain is well and truly out of the bottle. In allowing full encashment, a policyholder who remains non-UK resident for five complete UK tax years could utilise the applicable tax treaty and extract his full pension during that period.  A SIPP or Company Scheme would be taxable in the country of residence, which could have either favourable tax rates for full pension encashment or preferential tax rates for new arrivals, leading to either a zero rate or very low rates of tax on the full withdrawal.

In short, the [UK] government, by way of pension freedom have negated all of their constant QROP legislative tinkering over the past nine years in one go. Coming to terms with this would enable them to quickly bring UK regular pensions schemes and QROPS in line with each other, and also remove any inequality between EU and non-EU schemes.