Qualifying Recognised Overseas Pension Schemes (QROPS) worldwide are going through a period of realignment following the introduction of pension freedoms.
The new rules that came into force from April 6, 2015 call for QROPS scheme administrators to certify that they only pay out to retirement savers over 55 years old.
This new regulation is causing some hardship to administrators in some financial centres because their schemes are based on local rules that allow payments in some circumstances to younger retirement savers.
These include some of the most popular QROPS centres, such as Australia, Ireland and New Zealand.
Together, these three financial centres comprise 63% of the global QROPS market by number of pensions.
How QROPS rule changes affect expats
Australia is the largest centre with 1,654 pensions on the latest HM Revenue & Customs (HMRC) QROPS List published on May 19, making up 41% of the global number of QROPS. Ireland is the second largest centre with 787 QROPS comprising 21% of the market, while New Zealand lost 23 QROPS, leaving 34 listed as 1% of the market.
In these countries, pensions based on their internal pension rules are also open to expats as QROPS.
Compliance with the new rules does not make QROPS illegal or tax avoidance schemes, but merely means pensions that pay out benefits to anyone aged younger than 55 years old except in special circumstances no longer meet QROPS rules.
Anyone who transferred a UK pension pot into one of these schemes on or before April 5, 2015 remains unaffected and is unlikely to receive a tax demand from HMRC for switching their cash to an unauthorised scheme as the pension met QROPS rules up to that date.
The real issue concerns anyone switching a UK pension to a QROPS since April 6, 2015.
Who will pay 55% tax penalties?
If the cash has gone to a pension that no longer complies with QROPS rules, then they may face a penalty from HMRC starting at 55% of the transfer value of the tax-relieved pension that went into the fund.
HMRC quickly changed the QROPS List warnings for investors a few weeks ago to make clear that pensions on the list were self-certifying compliance and that consumers should carry out due diligence to ensure the scheme complied with offshore rules.
The likelihood is many schemes in Australia, Ireland and New Zealand will fail to qualify as QROPS from April 6, 2015 unless regulators force through quick rule changes to make their schemes comply with current UK rules.