Overseas Pension Transfers: The Pitfalls
24 / 02 / 2017
It is no secret that Brexit could have an impact on the City. In the coming months banks and other financial institutions will be making tough decisions on whether to implement contingency plans to ensure they retain access to the remaining 27 EU member states by moving business out of the UK. Inevitably this could mean jobs moving away from not just London, but the UK as a whole – published data shows that financial and professional services firms employ more than 2.2 million people across the UK.
Against this backdrop, we have seen an increase in demand from individuals seeking legal advice on potential overseas pension transfers. Brexit is fuelling this demand but there is no doubt that: (i) unprecedented low gilt yields and the subsequent rise in defined benefit transfer values; (ii) flexibility of the type of investments which can be held in overseas pensions; and (iii) the lack of HMRC limits applicable to overseas pensions, has also contributed to this demand.
Qualifying recognised overseas pension schemes or “QROPS” are the obvious destination of choice but what are the practical issues for those considering transferring their pensions abroad?
Choice of jurisdiction
Generally the number one factor for those looking to transfer, and particularly for those living abroad, is tax efficiency. Ultimately clients want a QROPS which is safe from subsequent attack from HMRC. The tax regime in the destination country needs to be considered carefully as does the ultimate choice of residence in retirement. Double taxation agreements (DTAs) which the UK has in place with many other countries need careful examination and advice is key. Currently the UK is a party to over 135 DTAs – these vary greatly between countries as can the tax treatment of regular pension income versus say, drawdown lump sums;
Attitude of the transferring scheme
In our experience, trustees remain nervous of paying monies across to a QROPS. The risk of such a transfer being anything other than an HMRC “recognised transfer” to a QROPS can lead to significant tax charges on both the member and the transferring scheme (especially risky where the member requesting a transfer is a high earner with a large pension pot). The difficulty for trustees lies in determining whether an overseas scheme is a QROPS. HMRC no longer publishes a list of QROPS but maintains a list of schemes which are self-certified recognised overseas pension schemes (ROPS). HMRC does not guarantee that transfers to any of the schemes on its list will be free of UK tax. This puts the onus heavily on trustees to satisfy themselves that they are making a recognised transfer. The changes to QROPS requirements from April 2017 are likely to introduce more uncertainty, at least in the short-term. Seeking a legal opinion on the validity of a QROPS is therefore strongly recommended;
The rise in pension scams has also put trustees on the defensive. Unscrupulous operators have been using overseas pension schemes as a means to invest in all manner of weird and wonderful overseas ventures. Typically these tend to be high risk and volatile. In some instances, little attention has been paid to the appropriate regulatory standards to ensure that the QROPS are properly constituted.
Advice before transfer
Since April 2015 members with safeguarded benefits worth over £30,000 must take advice from an independent FCA-authorised financial adviser before transferring, whether overseas or not. Individuals whose pension benefits meet this threshold face particular difficulties transferring them abroad because FCA-authorised financial advisers are unlikely to also have expertise in the overseas jurisdiction. The government has recognised this and consulted on whether this requirement should be removed or adapted for overseas transfers. A response to the consultation is expected in early 2017, but in the meantime the requirement remains and can prove a significant hurdle.
Transferring a pension pot overseas takes careful planning, but initial legal advice can ensure a successful, efficient transfer avoiding the many possible pitfalls along the way.