QROPS: Between expat need and tax loophole

Qualifying recognised overseas pension schemes enable people to transfer pension benefits held in one or more plans to a pension fund abroad, but the risk of liberation scams and unauthorised payment charges have alarmed trustees over the past few years, precipitating a sense of suspicion when it comes to transfer requests.

The main concern that people will have if they’re proposing to transfer to a QROPS is that it’s ‘safe’ – specifically safe from subsequent attack by HMRC

Ian Neale, Aries Insight

In the latest Autumn Statement, Chancellor Philip Hammond announced that the tax treatment of foreign pensions will be more closely aligned with the UK’s domestic pension tax regime.

This is not the first time overseas pensions have come on HM Revenue & Customs’ radar. In 2012, hundreds of Guernsey-based schemes were removed from HMRC’s QROPS list. According to experts, this has contributed to the rising popularity of Maltese QROPS.

Why Malta?

Malta “has gained traction amongst the advisory network”, primarily due to its regulatory environment, says Bethell Codrington, chair of the Malta Association of Retirement Scheme Practitioners and global head of international pensions at payroll provider TMF Group.

He suggests that one of the issues leading to Guernsey’s demise as a QROPS jurisdiction was that “it was seen as perhaps not... stringently regulated enough”.

Codrington says he doubts that much will change for Maltese QROPS with regard to Brexit, noting that “it is not a purely European issue” as there are QROPS all over the world, including in Australia and New Zealand.

Ian Neale, director at pensions intelligence provider Aries Insight, says tax is a key driver for those looking at a QROPS. “The main concern that people will have if they’re proposing to transfer to a QROPS is that it’s ‘safe’ – specifically safe from subsequent attack by HMRC”.

He advises that when looking to transfer, the security of the general tax regime in the destination country needs to be considered because “there are some countries which HMRC would regard as dodgier than others” in this respect.

Neale points out that HMRC “launched a dramatic attack on Guernsey” and many schemes were taken off the QROPS list overnight “because HMRC didn’t like one particular piece of legislation in Guernsey”.

This has notably benefited a number of other tax havens, according to Rachael Griffin, financial planning expert at platform provider Old Mutual Wealth. She says the Isle of Man and Gibraltar have also grown in popularity for overseas pensions. 

“These financial centres have benefited from the demise a few years back of Guernsey as a recognised jurisdiction for QROPS.”

Pension schemes fear sanctions

While some countries such as Malta have got trusted regulatory systems, many trustees are wary of QROPS transfer requests, according to Lesley Browning, partner at law firm Norton Rose Fulbright.

“I think trustees are actually quite nervous about paying money across to QROPS,” says Browning. “And I think rightly so,” she adds.

This is because if the QROPS turns out not to be a QROPS, that would render the payment an unauthorised payment, and would have “fairly horrendous” tax implications for the member but also for the scheme via the scheme sanction charge, Browning explains.

She says that when presented with QROPS transfer requests, many trustees are worried about the risk of scheme sanction charges being levied on the fund, pointing out that many transfer requests come from very high earners who have big transfer values.

Many fear that a transfer request could be linked to a liberation scam, explains Browning. Trustees also worry whether a member’s benefits will be less secure because “by transferring them out, particularly from a DB environment, they’re losing PPF protection as well”.

Are trustees too suspicious?

Penny Cogher, partner at law firm Irwin Mitchell, says she agrees that “it is definitely the case” that trustees are uneasy when it comes to granting QROPS transfers.

Cogher says a member can ask for a legal opinion to confirm a QROPS is properly constituted. This can provide an extra safeguard for trustees concerned about making a transfer because “they are viewed with suspicion”, she says.

She admits there are some QROPS out there “that aren’t fit for purpose”, but adds that many QROPS do meet appropriate regulatory standards.

Trustees might also be wary because if they make too many unauthorised payments, “there’s a risk that HMRC would take away the UK-registered pension scheme status”, says Cogher.

However, Cogher’s view is that, in this case, “if a set of trustees made a transfer to a QROPS in good faith, having done some investigation and believing that the thing was a QROPS, I personally can’t see that HMRC would come back against the pension trustees and make an example… by withdrawing that registered pension scheme status”.

She says: “HMRC really only clamps down on those pension schemes that aren’t actually legitimate pension schemes... That’s the wrong that they’re trying to sort out.”