Big changes are on the way for Qualifying Recognised Overseas Pension Scheme (QROPS) following Chancellor Philip Hammond’s Autumn Statement 2016 promise to align the tax treatment of foreign pensions with those in the UK.
The major change is the scrapping of the 70% rule.
The rule dictates that any QROPS outside the European Union must ring fence 70% of any tax relieved funds switched from a UK pension to a QROPS to provide retirement benefits.
Hammond is axing this rule from April 6, 2017 to allow all QROPS providers to offer flexible benefits in line with UK pension freedoms introduced in April 2015.
But the qualification rules for an offshore pension are also tightening.
Here is a summary of the proposed changes issued in a policy document by HM Revenue and Customs (HMRC).
Scrapping the 70% rule
Between now and April 5, all QROPS providers must check to see if their scheme still qualifies as a QROPS before ditching the 70% rule.
Any QROPS that fails the new tests must not receive any fund transfers after April 6, 2017.
HMRC warns that any money switched to a delisted QROPS after this date will be tax treated as an unauthorised transfer attracting a penalty starting at 55% of the value of any tax relieved fund.
A tax relieved fund is money that has received a top-up from HMRC. For example, a higher rate taxpayer saving £1,000 pays £600 into the fund and receives a £400 top up calculated as 40% of the gross contribution.
The tax top up transfers to a QROPS with the rest of the fund.
Bonanza for Malta QROPS?
Losing the 70% rule means QROPS providers can let any retirement saver aged 55 or over draw down their pension fund as they wish.
This includes taking all the cash in one go, drawing a regular income or taking money in lump sums as the saver wishes.
Until April 5, only QROPS based in the EU could offer this facility. One likely outcome is Malta QROPS will become a destination of choice for expats and international workers as they already allow flexible access.
As a bonus, they also come with a 30% tax-free lump sum and are available to any retirement saver wherever they live in the world.
Malta is already a popular QROPS choice for expats, with 29 pensions based on the Mediterranean island, according to the latest HMRC QROPS List.
Expats returning to the UK with a QROPS
Part of the pension shake-up changes the tax treatment of foreign pensions for expats. Any with a QROPS who return to the UK will find 100% of their pension benefits after taking the cash free lump-sum liable to income tax.
Current pension rules tax 90% of the balance of the fund.
Hammond explained the change is to stop expats avoiding tax on their pension savings by moving overseas for a short while, transferring their funds and then returning to the UK.
The time limit for taxing foreign pensions rises from five to 10 years, but only applies from April 6, 2017 to transfers from a UK pension to a QROPS or tax relieved contributions to a QROPS.
New rules for QROPS qualification
From April 2017, an offshore pension must pass two tests to remain or become a QROPS:
- A regulatory requirements test
- A tax recognition test
The tax recognition stays the same but the regulatory test changes in a bid to stamp out pension liberation scams.
Some scams set up as bogus workplace pensions to attract transfers by offering savers under 55 years old early access to their funds.
From April, if the offshore pension is an occupational scheme and the country where the scheme is based regulates occupational pensions, the test is failed if the regulator does not supervise the scheme. This disbars the pension from taking on QROPS status and makes any transfer of funds an unauthorised withdrawal.
For non-occupational pensions outside the EU, the scheme must be overseen by the financial regulator in the country where the pension is based for setting up and running a scheme. If the pension is not regulated, QROPS status cannot be claimed.
Pension age test changes
Several QROPS centres have had trouble meeting the QROPS pension age test. Hundreds of pensions in countries such as Australia and Canada have lost their status due to local pension rules being at odds with those in the UK.
For example, Australia QROPS allowed hardship payments and withdrawing cash to buy a first home to savers under the age of 55, while UK pensions only allowed some under 55 to take money from their retirement savings if they retired early due to serious ill-health.
From April 2017, the rules change and payments can be made to someone under 55 as:
- A serious ill health payment
- A short service refund of contributions
- A refund of excess contributions
- A winding up lump sum
Find out more: Download HMRC guidance on Pension Tax for Overseas Pensions [PDF]
QROPS Information and Guidance
For more information about QROPS and the benefits it provides, download the iExpats QROPS Guide or complete the Get Advice form.
