Qrops transfers will be hit with a 25 per cent tax charge unless they are made within the European Economic Area (EEA) or the QROPS is provided by the individual’s employer, the Treasury has confirmed.
The move is predicted to decimate certain non-UK Qrops providers who operate without an employer sponsor outside of the EEA. Providers operating from Malta, Cyprus and Lichtenstein will not be affected, but the new rules will hit providers based in Hong Kong, the Channel Islands and other non-EEA countries.
Budget ancillary papers published today confirm that transfers to Qrops requested on or after 9 March 2017 will be taxable unless, from the point of transfer, both the individual and the pension savings are in the same country, both are within the EEA or the Qrops is provided by the individual’s employer. Where this is not the case, there will be a 25 per cent tax charge on the transfer and the tax charge will be deducted before the transfer by the scheme administrator or scheme manager of the pension scheme making the transfer.
The Budget also widens the scope of UK taxing provisions so that, following a transfer to a Qrops on or after 6 April 2017, they apply to payments out of those transferred funds in the five tax years following the transfer.
The Treasury says the measure supports its objective of promoting fairness in the tax system. It continues to allow overseas transfers from pension schemes that have had UK tax relief that are made when people leave the UK and take their pension savings with them to their new country of residence.
Payments out of funds transferred to a QROPS on or after 6 April 2017 will be subject to UK tax rules for five tax years after the date of transfer, regardless of where the individual is resident.
Retirement Advantage pensions technical director Andy Tully says: “This appears to be a significant shutting down of the Qrops market, restricting overseas transfers to situations where people have an overseas employer’s scheme or the Qrops is in the EEA. The Government has been increasingly concerned about the use of these schemes for the past few years and this appears a major move to reduce their use.”
Momentum Pensions group CEO Stewart Davies says: “We are extremely concerned about today’s surprise announcement which is, in all but name, a tax on geographically mobile people who are assiduously planning for their future and providing for their retirement.
“The fact it will come into play so quickly is concerning as this will leave many advisers unprepared and uncertain about what to advise – which is as far from the ideal as you can get in a pensions sector which should be encouraging transparency and clarity in processes. We are crunching the numbers as we speak and will be in touch with our adviser partners shortly to help them make sense of today’s development.”
Aon Hewitt principal consultant Issiah Sakhabuth says: “This change goes against the basic principles set out by the government when the rules for transfers were changed in 2006. The whole point of having a QROPS test was for these transfers to be tax-free. This is close to going back to the old rules where transfers could only be made to a plan where the individual was resident.
“As well as being an administrative nightmare for UK plans, this could have unintended consequences for mobile employees. Indeed, many members who transfer to a third country – such as US persons who cannot transfer UK plan benefits directly to a US plan but can transfer to a third location – will be caught by this.
“These changes have immediate effect which does not give anyone enough time to plan around it.”
KPMG pensions parner David Fairs says: “There could be some unintended consequences in the proposal to impose a new 25 per cent tax on anyone transferring a pension to a different country to the one they live in. This is designed to discourage people from transferring their benefits to a jurisdiction just to enjoy lower taxes. The charge will not apply where someone genuinely moves and lives in the same country as their pension, but the problem is that this isn’t always possible. So for example, someone emigrating to the US is not able to transfer their UK pension there because of an incompatibility of US and UK rules. An expat in that position might want to transfer their pension to an offshore centre so that they could convert their pension benefit into US dollars but they too will now face a hefty tax.”