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Quirks of QROPS

When the great Guernsey QROPS bubble burst, many advisers had to start searching for jurisdictions that could not only offer QROPS, but more importantly had schemes that were robust enough to meet HMRCs new rules and regulations going forward.

At the end of the day, the last thing any adviser or scheme member needs is another jurisdiction being ‘struck off’ by HMRC part way through a pension consolidation exercise.

As such, the world of QROPS has shrunk significantly in the last 12 months and few viable options remain.

The current jurisdictions of choice are Malta, the Isle of Man and latterly Gibraltar following recent amendments to their legislation.

Malta in particular has been a jurisdiction that has offered QROPS for some time now. However, in the halcyon days of Guernsey when there was a jurisdictional price war that would have put Tesco and Sainsbury’s to shame, Malta was overlooked for all but the largest transfers due to the costs of their schemes.

The reality is that the fees levied by Malta schemes were actually quite reasonable for what you were getting, but compared with Guernsey they appeared expensive.

At this point it’s worth reminding ourselves that one of HMRC’s perceived ‘abuses’ of QROPS was the ability for members to have a ‘tax free’ income from a fund which had suffered no tax, whilst it was in the UK.

Now, clearly HMRC are not going to receive tax from another jurisdiction but we have to remember that QROPS were intended to follow rules that would generally apply in the UK and, as such, any jurisdiction that applies some element of taxation is clearly more likely to remain on HMRC’s list than one that doesn’t.

For example, the Isle of Man Treasury was very reluctant to make changes to its legislation to allow pension income payments to non Isle of Man residents to be exempt of tax, but finally relented to industry pressure (to allow the IOM to compete with Guernsey) and ‘50c’ schemes were introduced, albeit only for a short period of time.

To the IOM Treasury’s credit, it was savvy enough to leave the ‘old QROPS’ legislation alone and as a result of HMRC’s new regulations, they still remain an option.

As such, a lot has happened in the last 12 months and now more than ever, advisers really do have to be aware of each scheme’s nuances and more importantly, how they may impact on the scheme member not only now, but in the future when they actually need their pension commencement lump sum or start drawing down an income.

The 3 jurisdictions mentioned above all share one thing in common, and that is the fact that they all impose income tax once the scheme goes into drawdown, albeit at different rates:

  • Malta – 30%
  • Gibraltar - 2.5%
  • Isle of Man – 20%

On the face of it, Gibraltar clearly looks to be the front runner from a tax point of view. However, things are not as simple as that.

Malta schemes can withhold up to 30% of the income payment or they can apply a rate of 0% providing the scheme member’s country of residence has a Double Taxation Agreement (DTA) with Malta and the jurisdiction has an income tax system that covers pensions (albeit that a jurisdiction could tax pensions at 0%).

Some Malta schemes also allow more than one lump sum payment to be made to the scheme member subject to certain criteria being adhered to.

Malta currently has in excess of 50 DTAs in place with more being negotiated all the time.

Whilst Gibraltar’s 2.5% flat rate looks attractive, let’s be clear that nobody is saying the scheme member will only ever pay 2.5%. The final rate of tax that the scheme member will pay depends on their country of residence and how it deals with pension income. For example, if the scheme member’s local tax authority taxed pension income at 22.5%, then the overall rate of tax could be 25%.

Another point to consider is that Gibraltar does not currently have any DTAs in place, therefore tax credits in other jurisdictions for the amount paid in Gibraltar are unlikely. However, if the scheme member’s country of residence didn’t tax pensions at all and had no income tax system, then taking into account the Malta rules, Gibraltar’s 2.5% may be more than acceptable as opposed to the 30% that Malta would have to levy.

Members of Isle of Man schemes are subject to a flat rate of 20% on drawdown and, since tax allowances for non-residents were abolished a couple of years ago, there is nothing to really reduce the pain. The IOM does have a DTA with the UK therefore, if the scheme member does become UK resident, then they wouldn’t be any worse off from a tax perspective but like Gibraltar, the lack of DTAs in place could be a problem.

In summary, whilst no scheme will ever have a cast iron guarantee from HMRC that they will retain approval, dealing with one in a robust jurisdiction (such as the EU) which follows the ‘spirit’ and the ‘letter’ of HMRC’s new regulations is clearly going to be a safer bet.

Furthermore, once an adviser is happy with the jurisdiction, then it is vitally important that they are fully aware of what is possible now and in the future, not only from a tax point of view, but flexibility of the scheme also.