Qualifying Recognised Overseas Pension Scheme (QROPS) had an easy ride in Chancellor George Osborne’s Budget 2015 – but did not escape unscathed.
Although the Budget did not mention QROPS by name, Osborne has reduced the lifetime allowance for pensions from £1.25 million to £1 million.
However, he explained the change affected only 4% of high earners and that as a sop to cutting the limit, he would link future changes in the lifetime allowance to inflation from 2018.
The lifetime allowance is the maximum pension fund allowed by law – and if a fund breaches the limit due to growth or additional contributions, the retirement saver faces a tax charge.
Changes in the lifetime allowance do not directly affect QROPS, as they are not subject to the UK limit. However, if a fund is switched from the UK to a QROPS and the transfer value breaches the limit, a tax charge is due.
HMRC U-turn
The second issue for QROPS investors is a U-turn by the Treasury and HM Revenue & Customs (HMRC) that excludes the offshore pensions from flexible access rules starting in April 2015.
The government has decided that a restriction that requires QROPS providers to ring fence 70% of the value of any transferred funds to provide a pension for the investor must be adhered to outside the European Union.
Previously, the government had announced flexible access rules would apply to all QROPS.
Around 3,700 QROPS are offered by 45 financial jurisdictions around the world.
Although half the financial centres are in the European Union, hundreds of QROPS in Australia and Canada are not.
The government has indicated a consultation will take place on whether to extend the flexible access rules to these popular expat retirement destinations.
Flexible access denied
Flexible access rules are important to QROPS investors.
The rules allow them to withdraw their entire retirement savings with a tax free lump sum of at least 25% with income tax due on the balance, on to take cash from their pensions as they wish – on the same tax basis.
Regulators in Guernsey, Malta and Gibraltar have already stated that pension laws will change in their jurisdictions to allow providers to implement flexible access rules.
QROPS are pensions based offshore that offer British expats and international workers who have accrued pension rights in the UK flexible and tax effective retirement saving funds.
Around 10,000 transfers are made from British onshore pensions to QROPS every year, according to figures released by HMRC.
