The government is concerned that QROPS – non-UK pensions intended to operate similarly to UK pension schemes – are being abused. To counter the abuse, future transfers into a QROPS and from one QROPS to another will be subject to a 25 per cent tax charge unless certain conditions are met. Even where no immediate tax charge arises, actions taken up to five years later could create a liability.
The Treasury has identified transfers into certain non-UK pensions (QROPS) as needing reform. Transferring funds from a UK pension to a QROPS, for use by individuals who retire abroad – can provide more flexibility for the retiree.
The government estimates that each year there are between 10-20,000 transfers from UK pension schemes into QROPS, and accepts that the vast majority of these transfers are entirely legitimate. However, in a minority of cases the rules are being manipulated , at an estimated cost of over £10,000 tax lost per transfer.
The government response to the abuse runs to 29 pages of draft legislation, and 43 pages of guidance, together with many pages of explanatory notes. This approach almost guarantees that some innocent taxpayers will accidentally be caught by the new rules, and the consequences in such cases would be severe.
A new 25 per cent tax charge (the overseas transfer charge) will apply to any transfer from an existing pension scheme into a QROPS where the transfer is requested from 9 March 2017. There are exemptions from the charge, most importantly if, after the transfer, either:
- the pensioner and the QROPS are resident in the same country; or
- both the pensioner and the QROPS are resident in an EEA country.
However, if either of these conditions ceases to apply within five years of the pension transfer, the overseas transfer charge will be imposed. This means, for example, that if a pensioner with a Maltese QROPS ceases to be resident in the EEA within five years, a 25 per cent tax charge will arise on their departure. The member and the pension administrator will have an obligation to ensure that the tax is paid if due. In practice, the onus will be on the pension administrator, and this is likely to result in more paperwork all round.
QROPS have an important role in pensions planning for many individuals retiring abroad. Recent pensions changes have already severely reduced the number of QROPS options available, and there is a real danger that these will be squeezed even further by the threat of the new 25 per cent transfer charge. The complexity of the anti-avoidance rules being introduced also increase the risk that perfectly innocent taxpayers will find themselves being labelled as tax avoiders, and will be subject to tax charges that will severely deplete their pension pots.