UK citizens retiring abroad are seeing a change in pension schemes.
UK citizens retiring abroad see change in pension schemes
I am going to tell you about new legislation introduced simultaneously by Her Majesty's Revenue & Customs (HMRC) and the Guernsey government in respect of Qualifying Recognised Overseas Pension Schemes (QROPS). Some would say that this is an opening sentence that would frighten off all but the most dutiful of readers. And they are probably right.
But before you go, I will tell you something about my writing strategy that may be of interest. What I try to do is rope in the crowds with some tantalising subject of interest, like my holiday last year in Montana, where I learnt to ride and round up cattle. I then work the subject around to an associated financial topic. This approach ensures that there are at least a few readers who, having invested five minutes of their valuable time, will soldier on to the bitter end, no matter how mind-numbing the final subject matter turns out to be.
The trick is to get a plausible link. The more plausible the link, the more likely they will read on. Now you know my strategy, see if you can figure out how I am going to work my way round to QROPS.
I flew to the UK a couple of weeks ago with my 11-year-old granddaughter, Paige, and while she was absorbed in Alvin and the Chipmunks, I threw caution to the wind and exposed myself to maximum deep-vein thrombosis risk by watching three movies on the trot. I was looking for inspiration for this column, but though My Week with Marilyn aroused interest, it wasn't in the area of personal finance.
Neither did the Girl with the Dragon Tattoo throw up any fiscal ideas. On arrival at Heathrow, I was met by my wife and whisked off to the The Water Mill Theatre in Newbury, where we watched a rousing performance of Henry V. I was confident that somewhere in the dialogue, Shakespeare would have devoted a rhyming couplet or two to a QROPS or, at least, to a bit of pension planning.
This is a play about the battle of Agincourt, where Henry V's vastly outnumbered forces pull off an unexpected win against the French, chiefly through effective use of the English (or Welsh) longbow. As a result of this battle, a huge number of French estates were handed out to the English and Welsh warriors who thus became UK expatriates, destined for a life in France.
Moving to France in those days required little thought in relation to taxation and estate planning. If the king gave you a livelihood in the form of a conquered estate, you just took it and rejoiced in it.
But in today's world, the king (or to be more accurate, HMRC) is less generous with such handouts. One existing benefit that is available to UK citizens planning to retire abroad is QROPS. These schemes allow UK citizens to transfer their pension investments to an overseas location, where they are treated less onerously than they would be if left onshore. The benefits depend on the jurisdiction to which they are transferred, but typically are as follows:
Ÿ Income is paid gross of tax, whereas a UK onshore pension income is liable to income tax, no matter where you reside;
Ÿ No tax is deducted on death, whereas an onshore pension is subject to tax at 55 per cent before it is passed to beneficiaries;
Ÿ A tax-free lump sum at up to 30 per cent can be taken at commencement;
Ÿ Investment assets can be chosen to meet the specific need of each investor;
Ÿ All transferred money is outside the control of any future UK government rules;
Ÿ Multiple pensions can be consolidated into a single, easily managed investment.
These benefits are significant and explain the rapid rise in QROPS business since they first emerged out of the UK Finance Act, 2004.
The basic philosophy behind a QROPS is that an individual has the right to retire wherever he or she wishes and should be allowed to take their pension with them.
HMRC has objected to this in the past because it has given generous tax concessions on contributions and growth during the accumulation phase and would prefer to see the pension pot left onshore during the drawdown phase, where it can tax the income and, eventually, the lump sum, too, following death.
All this changed when the European Union directed the UK government to allow pension transfers to overseas locations. HMRC was, therefore, obliged to introduce the QROPS, but has sought to control its development through legislation. In particular, it has sought to ensure that the QROPS is used for providing a bona-fide pension and is not used for the purpose of "pension busting", or getting access to all the cash.
In recent legislation, HMRC closed a number of loopholes (for example, the New Zealand scheme can no longer be used to gain access to 100 per cent of the transfer proceeds) and made life difficult for some jurisdictions by insisting that their overseas pension scheme must offer the same benefits to local residents as it does to non-residents (the so-called Condition 4).
Guernsey is the biggest supplier of QROPS and had much to lose from the decline of this industry because local residents are taxed at 20 per cent, whereas non-residents are taxed at zero per cent.
In a miraculous effort over the past few months, Guernsey has changed its pension legislation to meet Condition 4. As a result, its QROPS schemes will still pay income to non-residents at zero per cent tax. It just goes to show how quickly laws can be enacted when a state's livelihood is threatened.
But on April 10, HMRC announced that the new Guernsey pension law will be recognised as a QROPS in respect of Guernsey residents only. This is contentious and will be challenged. Watch this space.
Bill Davey is a wealth manager at Mondial-Financial Partners in Dubai. Contact him firstname.lastname@example.org