Those in the know about QROPS are hinting Malta is the new go-to place for offshore pensions following the closure of hundreds of schemes.
Guernsey reigned supreme until tax rules changed in April 2012 – and now ex pats and international workers with UK pension rates are looking to Malta to fill the breach.
QROPs – short for qualifying recognised overseas pension schemes – are the most favoured offshore pension scheme for ex pats, with thousands of products offered in around 50 countries across the world.
Billions of pounds have been switched from UK pension funds in to QROPS since the schemes were introduced in April 2006.
However, why is Malta the new favoured home for ex pat pensions?
First, QROPS are a unique pension product for ex pats and international workers with UK pension rights, so as most retirement savers have a British connection, they like to look to somewhere that speaks English to do business.
Malta also ticks other boxes for QROPS investors -
- The island has robust financial regulation
- Malta is a full member of the EU and British Commonwealth with a tradition of political and financial security
- Pensions regulated on the island automatically meet HM Revenue & Customs criteria for QROPS
Financial laws regulating pension firms also give investors extra protection.
Companies running pension schemes on Malta must register with the Malta Financial Services Authority, which runs on similar lines to the UK Financial Services Authority.
Malta also builds QROPS on HMRC pension and tax rules rather than looking to exploit loopholes in the legislation to give pension savers financial advantages.
Politicians in Guernsey reckon that this was the Channel Island’s downfall as a financial centre as a succession of tax changes in the UK to close the loopholes have decimated business on the island – ranging from 300 QROPS schemes closing for transfers in to the collapse of mail order firms working in grey areas of UK VAT laws.
Finding the right offshore pension is easier now leading global financial firm QROPS.net has set up a one-stop advice centre to help retirement savers make the best choices.
As the rules for QROPS (qualifying recognised overseas pension schemes) change yet again to combat tax abuse on April 6, 2012, investors need to have a trustworthy and up-to-date reference source to make sure their pensions are performing at the top of the market.
The QROPS.net service does exactly that with a ‘whole of the market’ service covering every offshore financial centre offering QROPS.
Ex pats looking for a QROPS or reviewing their current financial arrangements as new tax rules take effect from April 6, can rely on QROPS.net to provide:
- Expert tax advice that marries income tax, capital gains and inheritance tax rules in the country where the QROPS investor lives with the UK and the country where the QROPS is hosted
- The latest product advice in this fast-changing market, including exclusive offers subject to availability and advance notice of the latest offshore centres to offer QROPS
- An independent advice service that tailors a QROPS scheme to the retirement saver’s financial objectives
- Ongoing product and investment performance reviews to keep a QROPS on track to meet the client’s retirement goals
Helping people around the globe
“We continually review our service to make sure QROPS.net offers the most comprehensive QROPS service to our clients,” said QROPS.net
“The QROPS market is complicated with products that change at short notice and rules that can easily catch investors unawares. We want to make QROPS simpler so clients can concentrate on managing their money rather than worrying about breaking tax rules.
“As leading QROPS advisers for several years, we believe we understand the market and what clients need to know when comparing products, investment returns and tax rules.”
QROPS.net is offering a QROPS comparison service across thousands of pensions and dozens of offshore centres for ex pats who want to transfer their UK pension.
A overseas QROPS pension is for retirement planning and the HMRC will not tolerate abuse of this
QROPS tax cheats can expect no mercy from HMRC. The UK tax man is ready to repel QROPS pirates manipulating the offshore retirement schemes to extract pension cash.
Documents published alongside Chancellor George Osborne’s Budget 2012 speech, leave no doubt about HM Revenue & Customs hard line on pensions cheats.
Besides confirming a list of expected QROPS pension rule changes, he has also fired a warning shot across the bows of any offshore financial centre offering QROPS pensions to former UK residents that give ‘unintended’ tax advantages.
“Where the country or territory in which a QROPS is established makes legislation or otherwise creates or uses a pension scheme to provide tax advantages that are not intended or available under the QROPS rules, the government will act so that the relevant types of pension scheme in those countries or territories will be excluded from being QROPS,” said a spokesman.
HMRC clamp down for the better
Under HMRC’s new robust anti-avoidance stance, offshore centres can expect close scrutiny to ensure they comply with the rules.
Retirement savers with cash in QROPS that break the rules can expect to pay tax penalties of at least 55% of the value of the funds they transfer in to the pension.
The new offshore pension regime that takes effect from April 6, 2012, ringfences existing QROPS but is likely to see many providers drop out of the running because their products no longer match HMRC’s minimum.
New Zealand QROPS are banned from offering up to 100% cash back to retirement savers and must safeguard no less than 70% of the funds transferred in to pay pension benefits, which stuffs a lucrative loophole for pension providers.
Third Party QROPS
Also under attack are so-called third party QROPS that are stationed in one offshore centre when the retirement saver lives elsewhere.
From April, these schemes must meet strict conditions that ban two-tier income tax advantages that let non-residents off with 0% tax while residents pay 20% or more.
“Changes in primary legislation will be introduced in Finance Bill 2013 to strengthen reporting requirements and powers of exclusion relating to the QROPS regime. They will support the changes in secondary legislation published for consultation on 6 December 2011,” said HMRC.
Signing up to whatever pension scheme your employer had on offer is one thing, but choosing an overseas scheme to transfer your pension pot to is a completely different matter. So when the time comes to transfer your pension assets abroad, how should you go about selecting another pension arrangement?
The first issue here is a rather comforting one: you are not alone. Most QROPS do not accept instructions from investors direct, and insist that you use an adviser to help you to navigate your way through the rules and regulations.
However, it is still worth considering what you are looking for. Fortunately for you, QROPS shoppers have plenty of choice, as there are well over a thousand QROPS list of approved schemes.
Not only do you have a wide choice of the countries which host QROPS to pick from, but there are also many kinds of institutions running them. These may include well known providers whose names may already be familiar to you, but may also include more innovative or niche financial services firms.
Investments and Funds
And then we come to the assets that QROPS hold. Some are simple vehicles containing stocks and shares. But others may have a more diverse range of underlying assets. If your pension scheme in the UK holds particular assets that you want to keep, you may even be able to transfer them to a QROPS in specie (as they are, without liquidating them), depending on what the pension regulations are like in your country of choice.
Some QROPS providers are able to offer bespoke schemes, although these may typically come with higher fees than those that serve investors by the thousand.
When it comes to QROPS fees, the same principles apply as with any kind of financial product. That is to say that transparency is the key. You need to know exactly what you will be paying, and when you have to pay it. If you use a large firm of advisers, you may even be able to get them to negotiate a significant discount on the fees that are originally quoted.
It may not be something that you like to dwell on, but what will happen to your loved ones after your death should be an important part of your retirement planning. After all, wouldn’t it be nice to pass as much as possible onto the next generation?
If you stay in the United Kingdom…
Unfortunately, if you stay in the United Kingdom when you retire, the Chancellor has designs on your money. With the coalition now in government, who knows what, if anything, will happen to the inheritance tax threshold. The IHT threshold may have been tweaked slightly with every Budget, but that does not change the fact that more and more people are getting caught in the inheritance tax net.
If you have already annuitized your pension, the UK rules are particularly scandalous, as the taxman virtually helps himself to the residue when you have died.
What is IHT planning?
IHT planning is what happens when a person plans their affairs in such a way that their loved ones do not have to pay as much inheritance tax. This can involve making sure that the value of your estate is below a certain level on your death, perhaps by giving away assets to your would-be beneficiaries or by using trusts.
Like any type of financial planning, it is better to start doing thinking about this sooner rather than later, although with IHT financial advisers typically understand that the investor does not want to dwell on the idea of their own death!
What does QROPS have to do with it?
QROPS are only worth considering if you are not going to be tax resident in the United Kingdom for at least 5 years. The scheme permits members of United Kingdom pension schemes to transfer their UK pension funds into approved foreign schemes without attracting an income tax charge.
However, depending on what country you choose to host your QROPS, you may be able to find a jurisdiction that does not charge IHT on it.
While you are on the subject…
While you are thinking about getting a QROPS, you may also want to review your other financial commitments and investments. After all, you may be able to carry out some inheritance tax planning on them too. But perhaps most importantly, you should consider making a fresh will. If your current will has become out of date due to the arrival of more grandchildren or other changes you might want to make to who gets what, take the opportunity to make a new one and make sure that your assets are distributed how you want them to be.
As a QROPS shopper, there are a number of decisions that you have to make before you settle on an overseas pension scheme. The questions below may help you come to the right decision.
Should you get one at all?
This is not a trick question. For the majority of investors, a QROPS will present a unique opportunity for a low tax, highly flexible pension. However, if you have already started taking benefits from your UK scheme, or if you have a final salary deal that cannot be matched elsewhere, then a QROPS may not be suitable.
Not all QROPS advisers are created equal. If you choose an adviser who has access to the whole of the market, then you effectively ensure that you have the full range of the thousand or so HMRC approved schemes at your disposal. However, if you stick to a tied agent, you limit yourself to the few that they are able to recommend.
As with all types of financial advice, it is best to go to someone who has plenty of experience of recommending the kind of foreign pensions that you have considering. If in doubt, ask what your IFA is used to dealing with. A generalist UK financial adviser may not have the depth of experience in offshore investments that is required.
Fortunately, you are not tied to your country of residence for your QROPS. Accordingly, you can choose anywhere that has QROPS for sale. QROPS are available all over the world from little country Malta all the way to New Zealand, although in practice places like the Isle of Man and Guernsey are very popular thanks to their tax neutral systems.
Which kind of QROPS?
Finally, you may wish to consider what kind of QROPS you are looking for. QROPS come in all shapes and sizes, hold a number of different assets and have a variety of structures. And if you cannot find a scheme that you like, why not ask your QROPS adviser about the possibility of creating your own?
How long should you take to choose a QROPS adviser? After all, this person will have control over how comfortable your retirement will be. Accordingly, it’s worth taking a few moments to choose someone you feel comfortable would be the best for the job.
Independent is best
If you’ve ever been tempted to buy a pension or other financial product from a bank that already has you as a customer, you may have considered how easy and convenient it would be. However, taking a moment to look around for someone else could pay dividends.
This is because a tied agent is, by definition, tied to offering only those products that their bank or building society has available. Accordingly, this means that they may not be able to offer the most competitive deal for you on the market.
By getting an independent QROPS adviser to look around on your behalf, they can use their knowledge of the products out there on the market to find the best deal for you. Whilst independent agents may be paid commission, they are bound to look for the best deal for you.
Specialist in pensions, specialist in offshore pensions
Some investors tend to use the same financial adviser for everything. But getting a QROPS from one is rather like asking your GP to perform open heart surgery on you. Admittedly, not quite as risky, but getting a specialist is still worthwhile. Pensions are their own specialised niche of the financial world, of which QROPS and offshore investments form a sub-niche.
A general independent financial adviser may be quite right for day to day domestic financial decisions, but when it comes to retiring abroad, the consequences of making a mistake could affect your whole future.
The days when professional advisers like surveyors, doctors, lawyers and accountants laid down their instructions to be blindly followed are long gone, and rightly so. As a modern investor you want to understand which QROPS is best for you, and what the tax and investment implications are of making that decision.
So when you choose QROPS advice, rather than picking an adviser who speaks only in technical jargon, choose someone who can explain things in normal, everyday language.
When you have decided on which QROPS to get, your adviser should do all of the work involved in contacting the providers and making the arrangements. Accordingly, it is important to get an adviser who is efficient, to make sure that these things happen as quickly as possible.
Finally, if you are working abroad rather than retired, you may want a firm of QROPS advisers who have international reach, so that their advice can follow you wherever you go in the world. A firm with advisers in a variety of places should be able to look after your financial planning for the rest of your life.
What are the advantages and disadvantages of QROPS?
Transferring your pension fund into a QROPS pension scheme is a serious decision, which should be undertaken with the benefit of professional advice. What can you expect the adviser to say, and what will their advice mean?
The main reason that people investigate the possibility of transferring their fund to a QROPS is that they donâ€™t want to pay UK income tax on their pension fund once they have left the country.
Before the introduction of QROPS in 2006, withdrawals from UK pension schemes made by members who had moved overseas were subject to an income tax charge of at least 25%, notwithstanding that the member had left the country. Accordingly, investors who planned to retire abroad felt that they were being held to ransom by this rule.
The QROPS system involves a long list of foreign schemes which are approved by the HMRC for receiving UK pension funds free from payments of UK income tax. To gain admission to this list the schemes must be treated and regulated as pension schemes in their own host jurisdiction. They must also report to the HMRC on payments made from the scheme within the first five years of the memberâ€™s non-residence. After that first five years, the HMRC falls out of the picture.
Accordingly, an advantage of using a QROPS is that you can escape UK income tax on your pension if you move abroad. You will be subject to the tax regime of your country of residence and the host QROPS country (if they are different). However, this is something that your QROPS adviser should take into account in your financial planning.
The UK pension system seeks to protect older people by insisting that pension scheme members purchase an annuity or make similar arrangements to provide an income when they reach 75. The system also restricts the members ability to draw down lump sums. These measures are ostensibly to assist members to plan their retirement in such a way that their pension pot lasts until their death.
This may be very sensible, but members might have other ideas about how and when to spend their pension monies. For example, you may wish to withdraw a larger lump sum than the UK system will permit, in order to help your children onto the property ladder.
This is where a QROPS can be beneficial. If you outline your plans to your QROPS adviser, he or she can choose a jurisdiction that permits investors to withdraw monies sooner than the UK regime would allow.
Exchange rate certainty
Fluctuations in interest rates can knock thousands off the value of your pension scheme. If you are planning to retire overseas and receive income from a UK pension, this is an important factor in your financial planning. Transferring your pension to a QROPS and receiving an income in the currency of the country where you live might help you. On the other hand, some QROPS let members hold funds in a different or combination of currencies.
Inheritance tax rules
The pension fund of an ex-pat is still liable to UK inheritance tax, if it is held in a UK scheme. Some QROPS allow your beneficiaries to take the fund or assets held by it tax free on your death. Other jurisdictions make a charge to inheritance tax but at a rate that is preferential to the UK system. Your QROPS adviser should be able to tell you which jurisdiction would best suit your needs for the purposes of inheritance tax planning.
Notwithstanding the growing popularity of SIPPs (self invested personal pensions) in the UK, there are still many restrictions about what can and cannot be held by a pension fund. Some QROPS host countries (like Guernsey) are much more relaxed about what class or classes of assets your pension fund holds, and how much control you have over them.
Depending on your situation, there may be some drawbacks to using a QROPS.
If you are lucky enough to have a defined benefits scheme like a final salary arrangement, you will need to consider carefully whether you will lose any benefits of your pension scheme as a result of the transfer to a QROPS. Your QROPS adviser should be able to give you enough information on this point to make a decision.
Wanting to go back
If you want to return to the UK within five years, a Qualifying Recognised Overseas Pension Scheme Â may not be for you, check with your adviser.
Fees and charges
QROPS trustees charge fees for administering and managing pension funds. Examine these carefully, and assess whether the benefits of a QROPS will outweigh the costs.
Offshore pensions are a tax effective and flexible investment option for Brits living or retiring abroad permanently.
These offshore pensions – or QROPS (Qualifying recognised Overseas Pension Schemes) – suit the financial needs of most expats, but in some particular cases, personal circumstances might mean looking for a different investment solution.
This article will outline some very useful information, however please read more about QROPS from other reports and article around the web.
One of these is if an individual has a big investment fund to transfer.
Adding up a pension lifetime allowance
Every individual has a lifetime allowance – or LTA – for the total amount they can contribute to a pension scheme.
The lifetime allowance is adjusted every financial year – for 2010-2011 the LTA is £1.8 million.
If you have a massive pension fund exceeding £1.8 million for transfer in to a QROPS (Qualifying Recognised Overseas Pension Scheme), the taxman registers the transfer as ‘crystallisation of benefit’ that triggers a tax charge.
A lifetime allowance test is only triggered, and a lifetime allowance charge only arises, when a benefit is crystallised.
It will be clear from the type of benefit crystallisation involved whether the chargeable amount is a lump-sum amount or a retained amount.
If the amount crystallised is retained in the QROPS to provide pension benefits then the chargeable amount is a retained amount taxable at 25%.
This applies to any amount crystallising over and above the member’s available lifetime allowance.
If the amount crystallised is paid as a lump sum, to or in respect of the member the chargeable amount is a lump sum amount taxable at 55%. This applies to any amount crystallising over and above the member’s available lifetime allowance.
Expats with small pension funds
At the other end of the scale, someone moving abroad who has a small pension fund – like a transfer value of £50,000 or less – may find the set up and running costs of a QROPS are just too much for the amount they want to transfer and that charges may take too long to recoup even under the favourable tax and investment environment of a scheme.
Picking the right place
Setting up a QROPS is not a problem for a UK expat – but some countries have tax rules that conflict with a QROPS. Specialist advice should definitely be taken if the pension holder wants to live in the US, Australia or New Zealand.
Misselling of QROPS
HM revenue and Customs maintains a database of about 1,700 authorised QROPS schemes.
The basic QROPS rules say that the scheme should follow UK tax rules for the first five tax years after it is established and that at least 70% of the fund should be used to provide pension payments in retirement.
Some advisors are giving potential QROPS investors the idea that this means that after the first five tax years, the investor can draw down more than 30% of the fund as cash as the QROPS provider no longer has an obligation to inform HMRC of any cash withdrawal.
This is not what the QROPS rules say in wording or in spirit.
The objective of a QROPS is to give British expats pension benefits to which they would be entitled if they had remained in the UK.
Drawing down more cash than the scheme allows at any time is an ‘unauthorised withdrawal’ and has some knock-on effects:
- The pension holder of the draw down should inform HMRC
- The excess drawdown triggers a tax charge of up to 40% and a surcharge of up to 15% – a total of a potential 55% penalty on the sum drawn down.
- The scheme is no longer a QROPS as the rules have been breached
The up shot of this is the pension holder could face a large tax bill and the country where the QROPs is established could be struck off the HMRC database. This happened not so long ago to Singapore for alleged QROPS misselling.
Taking best advice
If you are considering starting a QROPS, talk to a specialist QROPS advisor who has a portfolio of QROPS clients to show that he or she has a full understanding of the complex rules and regulations surrounding offshore pensions.
If your current UK pension provider refuses to transfer funds to a scheme, that should set alarm bells ringing because your provider will have checked the bona fides of the QROPS scheme with the HMRC database. If the scheme is not on the database, the provider is not allowed to make the transfer.
Cross-border misselling makes policing the system more difficult and diminishes the likelihood of the return of any investment.