We recently covered the opportunities offered by QROPS for UK pension holders looking to become non-UK tax resident. There are, however, a number of risks that need to be avoided...
The most significant risk is the requirement for the policy holder to be non-resident in the UK for at least 5 tax years before carrying out any actions that might be incompatible with UK pension rules (for example purchasing a residential property, or “pride in possession” items such as holiday homes and timeshares, antiques or art, boats/aircraft/cars, or fine wines from which one can directly benefit).
Why?
The reason is that within this period the QROPS administrator has to report to HMRC any actions that breach UK pension rules. Failure to do so would risk the QROPS from losing its qualify status, which it is presumably anxious to keep.
This would then lay the pension holder open to an ‘unauthorised payments’ tax charge. At the end of the 5 year period, those wishing to exploit a more liberal regime than the UK allows (such as taking lump sums greater than 25% or making investments that would not be permissible in the UK), should consider transferring to a non-regulated scheme.
Transferring to Non-Regulated Schemes
A transfer is necessary because were a QROPS to permit such actions, even beyond the 5 year reporting period, this could jeopardise its ongoing “qualifying” status with HMRC. Normally such a transfer to a non-recognised scheme would give rise to an unauthorised payment charge on the member and any QROPS making such payments must supply HMRC with the name and address of the scheme member and the date, amount and nature of the payment.
However, these reporting obligations do not apply beyond the 5 year non-resident period.
What are the Other Risks?
The other risks that need to be considered are:
• Investment Risk. A wider range of investment options may be available than in a UK scheme, and suitability of these to one’s long term objectives should be assessed.
• Investment options within any recommend QROPS should be examined.
• Moving the underlying fund value to another scheme may well involve a change of currency and the exchange rate on transfer should be borne in mind. So too should the actual costs/fees/commission of the transfer.
• The tax regime of the jurisdiction into which the pension is being transferred needs to be studied. Please note that the tax payable on pension income will be determined both by the rules of the country in which the QROPS is tax resident, and also by the member's country of residence (if these are not the same). A double taxation treaty between the two countries may offset any tax due to the member’s country of residence.
• Any payments may be added to the deceased member's estate and potentially liable to inheritance tax in the country of domicile. This may be different to the country of residence, potentially giving rise to double taxation.
• Finally, one needs to consider the strength of the regulatory regime governing the QROPS. This may not be as stringent as the UK, leading to further risks in the case of mismanagement.
Practical Tip
Before committing to anything, make sure that you take professional advice and are fully aware of the financial consequences of a QROPs, as well as the tax implications.
By Robert I Fraser
