Global Investments
International Limited

Following the introduction of pensions simplification on 6 April, 2006, radical changes were made to the rules governing transfers from UK-registered pension schemes to offshore pension schemes.

Simply, individuals who migrate from the UK are able to transfer their UK pension funds to an over-seas scheme, provided it is a Qualifying Recognised Overseas Pension Scheme (QROPS) registered with Her Majesty's Revenue & Customs (HMRC).

A list of QROPS is available at HMRC’s website www.hmrc.gov
.uk/pensionschemes/qrops.pdf although it should be appreciated that this list is not exhaustive as it does not include QROPS that have not consented to have their details published.

UK ties

The scheme rules of the QROPS must be broadly equivalent in terms of treatment to a UK-registered pension scheme, and the QROPS trustee must provide HMRC with information on certain 'events'.

For example, a QROPS provider must notify HMRC that a transfer has been made if the individual is resident in the UK at the time or in one of the previous five tax years. With regards to transfers, they are obliged to report future payments made to individuals who are resident in the UK at the time or in one of the previous five tax years. This enables HMRC to establish whether the QROPS has made a payment which, had it been made from a UK scheme, would have been an unauthorised payment.

In the UK, there is a requirement to purchase an annuity by the age of 75 or take up an Alternatively Secured Pension (ASP). These funds are treated as the top laver of someone's estate on death, and are reduced by any income tax arising from the unauthorised payment charge.

The combination of income tax and inheritance tax (IHT) can amount to a total tax charge of up to 82%.

Annuities can be extremely unpopular in the UK but with a QROPS there is no compulsion to purchase one. So the individual may choose to hold the money in a high-interest offshore bank account or place it in an offshore bond or capital-protected offshore investment. Others may use the money to purchase a property in the hope that the rental income will return more than an annuity would with the possibility of a capital-gain bonus.

Cross-country

What has opened up the QROPS market is the fact that the member need not reside

where the QROPS is registered.

A QROPS is structured in a similar manner to a UK pension. So if there is an investment vehicle owned on an individual's behalf by an administrator, this trustee must be based outside the UK and approved by the HMRC as a QROPS administrator. A wide range of investments is possible within a QROPS and the possibilities become more or less unlimited once the QROPS member has been non-UK-resident for five tax years or more.

Furthermore, there is no limit to the size of funds that may be accumulated within a QROPS.

Additional tax

A transfer from a UK-registered pension scheme to a QROPS is a 'benefit crystallisation' event. This means it will give rise to an additional income tax charge where the transfer exceeds the individual's Lifetime Allowance (LTA). This allowance is currently set at £1.5m (for the 2007-08 tax year). But as the payment is not to the individual, the rate charged is 25% where the member is below normal minimum pension age – rather than 55% – despite the fact that it involves a lump sum.

There will be no effect on the annual allowance as it is not a contribution (although all payments made in the pension input period up to the date of transfer will). Transfers below the LTA will not attract a tax charge on transfer but only so long as the overseas scheme is a QROPS. After the transfer. Other charges may also be applicable because certain payments made out of overseas schemes containing funds that have benefited from UK tax reliefs may be liable to UK tax charges, such as the annual allowance, lifetime allowance and unauthorised pay¬ment charges.

An individual whose UK tax-relieved rights have been transferred to a QROPS could be liable to an unauthorised payment charge unless. when a payment is made to, or in respect of, the individual by the QROPS, they are not resident for tax purposes in the UK and have neither been UK-resident in that UK tax year nor in any of the previous five tax years.

Fund reporting

After transfer, the QROPS provider must report to HMRC any payment made to the member if it exceeds 25% of their fund, or if the member takes benefits before they are permitted in the UK.

If this happens, HMRC reserves the right to tax the individual at between 40%

and 55% of the payment if the member was a UK resident in the tax year of withdrawal, or in any of the previous five tax years.

Meanwhile, in Alistair Darling's Pre-Budget Report on 9 Oct. 2007, it was announced that IHT 'protection' would be extended to UK-tax-relieved pensions savings held in overseas schemes. The change will be back-dated to have effect from 6 April, 2006 when it was inadvertently removed.

QROPS COUNTRIES

Australia and Ireland are the two jurisdictions where the most QROPS are registered Turkey, Mauritius, Malaysia, Cyprus, Bangladesh, Barbados, Bulgaria, Hungary, Liechtenstein, Russia, St Vincent & Grenadines and the Czech Republic all have one each (that have consented to have their details published by HMRC) The list of QROPS is updated twice a month by HMRC (provided new schemes are added)

Overseas checks

Care should always be taken to ensure that tax rules governing pensions in the overseas jurisdiction are no more onerous than in the UK.

For example, what may have been tax-free cash in the UK could be converted into a taxable pension overseas. This has to be weighed up against any tax liability there might be in the overseas jurisdiction on the same tax-free cash, had it come from the LK scheme. It is important to check the double taxation treaty between the UK and the overseas jurisdiction to ensure there are no unpleasant surprises.

It should always be stressed that tax considerations are one of a number of points that need to be looked at carefully when considering a transfer out of any UK pension scheme.

It is also vital to assess whether the transfer represents good value, particularly where it comes from a defined benefits scheme. So individuals should always seek the counsel of a suitably qualified adviser who has been granted the relevant permission by the Financial Services Authority.

SUMMARY

Emigrants can transfer their UK pension to an overseas policy if it is a QROPS scheme registered with HMRC. HMRC must be notified of 'events' such as transfers.