Bulletins | September 4, 2015

ROPS this all about? HMRC goes on the offensive against QROPS

Since April 2015, HMRC has been firing on all cylinders to ensure that any overseas pension scheme claiming to be a Qualifying Recognised Overseas Pension Scheme (or “QROPS”) satisfies the necessary requirements. While the casualties mount up, we look at the reasons why war has been declared.

Since April 2015, HMRC has been firing on all cylinders to ensure that any overseas pension scheme claiming to be a Qualifying Recognised Overseas Pension Scheme (or “QROPS”) satisfies the necessary requirements. While the casualties mount up, we look at the reasons why war has been declared.

Transfers from UK registered pension schemes to QROPS have recently become subject to rigid review by HMRC.

QROPS were introduced by the Finance Act 2004 on 6 April 2006.  Since that time they have been used extensively to provide pensions benefits to those individuals who, due to their own personal circumstances or work commitments (and perhaps to reflect an international lifestyle), require more flexible pension arrangements than might otherwise be available.

The QROPS List

Prior to April 2015, HMRC published a ‘QROPS List’ to allow UK registered pension scheme administrators and trustees, and overseas pension scheme managers, to verify, as part of their due diligence, that a particular overseas pension scheme had satisfied HMRC’s conditions for QROPS status.

As a reminder, those conditions were that the scheme in question must:

  • be a pension scheme;
  • be based overseas (i.e. not in the UK);
  • qualify as a Recognised Overseas Pension Scheme (“ROPS“), which requires certain conditions to be met relating to where the scheme is established, how the scheme provides benefits to its members and how those benefits are paid; and
  • satisfy additional requirements largely connected with providing information and reporting to HMRC.

For the trustees of a UK registered pension scheme, it is vitally important that any transfer from their scheme to an overseas pension scheme falls within the QROPS regime in order to avoid adverse tax consequences, both for the transferring member and for the UK scheme itself. A transfer to a non-qualifying scheme will be an unauthorised payment and subject to penal tax charges.

The ROPS List

On or around 15 April 2015, HMRC removed the word ‘qualifying’ from the list, leaving us with a ‘ROPS List’. This was followed by the unusual decision to suspend the ROPS List on 17 June 2015 so that HMRC could make changes to it.

Later, on 1 July 2015, HMRC published the reformatted ROPS List, which is regularly updated on the first and fifteenth working days of each month.

QROPS to ROPS: reasons for the change

HMRC recognised that previous QROPS and ROPS Lists included schemes that did not meet the requirement that a member should not receive benefits before reaching age 55.  This had in fact been a requirements since A-Day, 6 April 2006, but was refreshed and given the formal title of the Pension Age Test as from 6 April 2015.

The enforcement of the Pension Age Test led to an overhaul of the List and, as a result, thousands of overseas scheme have now been removed. For example many schemes based in Australia, Ireland and New Zealand, despite being highly regulated, fail the Pension Age Test because they allow for the payment of pension benefits to a member before reaching age 55 due to financial hardship. However, under a strict interpretation of the ROPS requirements, such payments are not allowed and, consequently, these scheme were removed from the ROPS List by HMRC.

What is the current ROPS List?

HMRC has always maintained that, rather than being a list of overseas pension schemes which have been approved as ROPS or QROPS, the ROPS List is simply a list of those schemes where the scheme manager has told HMRC that it meets the conditions to qualify as a ROPS and please can the scheme be included on the ROPS List. That position is maintained today.

Indeed, the warnings given by HMRC relating to proper due diligence and tax charges on the webpage immediately preceding the current ROPS List illustrates that the ROPS List is not to be seen as a definitive statement as to whether a listed overseas pension scheme is a QROPS; or indeed, a ROPS.

How to use the current ROPS List?

Trustees considering a member request to transfer pension benefits to an overseas pension scheme should proceed with caution. A transfer to an overseas pension scheme (other than a QROPS) will not be a recognised transfer and, consequently, there are a number of adverse tax implications, namely:

  • An income tax charge of 40% of the amount of the transfer value
  • If the transfer payment and any other unauthorised payments to the member within a 12 month period exceed 25% of the member’s accrued rights, the member becomes liable to an unauthorised payment surcharge of a further 15% of the payment
  • A scheme sanction charge may also be payable

Therefore, the Trustees should first take legal advice and carry out reasonable due diligence to satisfy themselves that the receiving scheme is a QROPS, including:

  • Checking whether the member has a right to transfer (whether under legislation or the scheme rules)
  • Assessing the receiving overseas pension scheme (for example, by reviewing its governing documentation)
  • Requesting a copy of form APSS 251 (this is the form used by the scheme manager of the QROPS to provide the required information and notifications to HMRC). Which should include the QROPS reference number
  • Regularly checking the ROPS List and printing a hard copy of the ROPS List to keep with the scheme’s records the day before the proposed transfer date

Of course if the receiving scheme is not a QROPS, the member will be left with the 40% income tax charge and, potentially, an additional surcharge of 15% (see above). It would therefore also be prudent for the member to also conduct their own thorough background checks before requesting the Trustees to process the transfer.