Easy access drawdown rules for Qualifying Recognised Overseas Pension Scheme (QROPS) come with a twist in the tail.
The Treasury and HM Revenue & Customs (HMRC) have confirmed QROPS are included in pension reforms that start from April 6, 2015 – which means retirement savers can access their QROPS fund as and when they wish.
However, the government has so far held back on explaining the detail of how this will work for expat retirement savers, but promised guidance before April.
Some industry experts have looked at the technical guidance for QROPS and figured out that a two-speed market may emerge.
They also feel this could be the issue causing a problem for lawyers drafting the new rules.
Current QROPS rules demand that providers should ring fence 70% of any funds transferred from a UK onshore pension into a QROPS.
The pensions overhaul means this rule will have to be scrapped so all the pension fund is accessible on drawdown.
Double taxation agreements
To smooth how this would work in practise and to try to control any potential tax avoidance, QROPS must be regulated by the pensions or financial authority in the jurisdiction where they are based.
In the UK, retirement savers will be able to draw lump sums from their pension, using the fund like a bank account.
The first 25% of this drawing will be tax-free and the balance taxed at the retirement saver’s marginal tax rate.
This becomes complicated for QROPS depending on whether the financial jurisdiction where the QROPS is based has a double taxation agreement with the UK.
If the financial centre has an agreement, then the industry believes income tax will be deducted at the retirement saver’s marginal rate in that state.
If not, the belief is the QROPS investor will pay tax at their equivalent marginal rate in the UK.
Two QROPS centres not listed on HMRC’s double taxation agreement pages are Gibraltar and Kosovo.
This leaves a host of problems.
Tax complications
For example, many QROPS centres demand the retirement saver should live within their jurisdiction. Guernsey is one such place.
Others, such as the Isle of Man or Gibraltar, allow third party QROPS, which mean the retirement saver can live where they like while their QROPS is based in another jurisdiction.
So, under current rules, a QROPS investor can have a QROPS in Gibraltar, but be a 0% income tax paying resident in Dubai.
The Treasury and HMRC are debating this conundrum of how to track and tax QROPS retirement savers, but decline to make any comment about how the system might work.
