QROPS Pension

QROPS Pension changes! Guernsey authorities are clamping down on tax loophole that lets UK expats transfer their pension funds to the island and then take all the cash out tax-free.

The island’s tax authority is now closing the doors on two loopholes exploited by UK expats and their advisors to withdraw all the money in their pension funds without paying any tax.

The two loopholes are:

• Switching UK pension funds and investments in to a Guernsey Retirement Annuity Trust Schemes (RATS) and then collapsing the fund to allow all the cash to be taken tax-free
• Switching UK pensions offshore to Guernsey and then transferring them on to a new offshore pension fund in another tax jurisdiction with the aim of taking the entire pension fund tax-free.

The main tool for opening these loopholes is the QROPS Pension – a Qualifying Recognised Offshore Pension Scheme - that allows UK pension holders who are retiring outside of the UK to set up an offshore pension scheme that has HM Revenue and Customs approval in another country.

HMRC has worked behind-the-scenes with Guernsey tax chiefs to close the loopholes and stop the perceived misuse of the QROPS scheme.

Guernsey has responded by stopping up the gaps in fear of having their lucrative investment schemes removed from the HMRC approved list.

‘Our discussions to date have proved most constructive,’ said Rob Gray, the island’s Administrator of Income Tax.

‘We are now acting to maintain Guernsey’s good international reputation and to ensure that there is no damage to quite legitimate international pensions business, which forms a significant part of this particular sector of the finance industry.’

The new rules that maximum lump sum cash drawdown from a Guernsey QROPS scheme is now limited to a maximum 25% of the total fund.

British expats also face the same conditions for membership of a Guernsey RATS scheme as people living on the island, which is designed to put a halt to collapsing the trusts.

Also, funds held in a Guernsey QROPS for a non-resident that originated wholly or partly from a UK pension scheme, can only pay on to another scheme if the onward scheme has QROPS approval from HMRC and the benefits are no more beneficial to the expat than those allowed in Guernsey.

One of the problems for compliance authorities is QROPS providers have no obligation to tell HMRC of any fund drawdowns after the pension holder has been UK non-resident for five clear tax years.

This rule allows the Guernsey QROPS to be closed after five years and the funds sent on to another tax jurisdiction where all the cash can be taken tax-free by the investor.

Guernsey is a favourite with QROPS investors because of the island’s solid reputation as a stable financial centre with much lower tax rates than those in the UK.

Effectively this action levels the QROPS cash lump sum limit for most schemes to 25% of the fund value – except QROPS based in New Zealand that have tougher joining criteria and higher fees.

‘There should be no ability to take 100% of the fund as a lump sum now these conditions have been imposed,’ said Mr Gray.

‘These conditions do impose further restrictions on the use of Guernsey schemes for non-residents, but they continue to demonstrate that Guernsey is committed to ensuring that pension schemes are used for the purpose for which they are established – to provide a pension for individuals in retirement.’

A New Zealand QROPS investor has to be aged at least 50 years old, not resident in the UK and with no intention to ever return to the UK plus has to prove he or she can sustain their living in retirement should all the pension funds be withdrawn.

New Zealand QROPS Pension can also work out more expensive than those in other jurisdictions as the providers front load their fees to cover for losing income if the entire fund is withdrawn.

The Treasury said it has sanctioned hundreds of transfers of pensions to QROPS schemes.

The government takes the stance that a QROPS Pension simplify drawing a pension abroad for UK expats.

HMRC monitors foreign jurisdictions to make sure they complied with basic UK pension rules and were no more attractive, from a tax position, than remaining in the UK.