Originally published in Professional Adviser, 30 September 2010

Until 2006 non-UK residents who had historic UK pension entitlements could only transfer those funds offshore under certain limited circumstances which were usually linked to their employment. Where they did not meet the specific exemption, they had to keep their pension funds within the UK system even if they had no other ongoing link to the UK.

This created concerns over the movement of capital within the EU, and a new system to allow a more flexible pension transfer process for non-UK residents was developed. The new Qualifying Recognised Overseas Pension Scheme ("QROPS") arrangements were introduced with effect from 6 April 2006 by the UK authorities and are available to individuals who have already left the UK or who are expecting to leave the UK shortly.

Under these new arrangements the UK pension assets could be transferred to a new non-UK pension scheme, provided the new scheme gave broadly similar pension benefits to the members as the UK pension rules. There are also restrictions on how the funds may be invested (for example residential property is not permitted), which again is similar to UK pension rules. To ensure compliance with this, the trustees of a QROPS have a number of obligations. The main one is to undertake to report the benefits paid to a member during the five year period from when the member became non-UK resident.

Although there are obligations and restrictions imposed upon the trustees and the fund investments of a QROPS, there are many benefits in moving UK pension monies to QROPS. The main ones are as follows:

  1. an annuity does not need to be purchased at retirement
  2. the pension may be drawn down in a number of flexible ways
  3. there is a far wider range of investment options
  4. the funds are wholly outside the UK Inheritance and pension tax charges, and also the newly proposed 55% Tax Relief Recovery Charge

The UK's pension legislation is currently being reviewed to make them simpler and more flexible, and whilst the new proposals will almost certainly improve the position for holders of UK pensions, the aforementioned QROPS benefits will not change and QROPS are expected to continue to provide substantial benefits to non-UK residents.

The Guernsey finance industry has for many years specialised in the provision of offshore pensions, for example International Pension Plan's for internationally mobile senior executives. To build on this, quite uniquely the industry and Guernsey government departments have worked very hard together to develop the QROPS market to ensure that Guernsey is the destination of choice for QROPS.

The Guernsey Tax Department instigated a meaningful dialogue with HM Revenue & Customs ("HMRC"), which is still ongoing. The information obtained from this exchange has with the consent of HMRC been shared with the Guernsey QROPS service providers. This has allowed them to specialise in this area and demonstrate their expertise with innovative new QROPS products, which meet HMRC's views on how they should be run.

To further promote Guernsey's financial services industry, the authorities have also worked hard to update the Trust, Company and Tax legislation, and agreed Tax Information Exchange Agreements with other countries, which allowed Guernsey to be included on the OECD whitelist of jurisdictions – this all shows that Guernsey is a modern and robust offshore financial services area.

At the start of 2010 HMRC introduced new legislation creating Qualifying Non-UK Pension Scheme ("QNUPS") arrangements, which confirmed that the assets of certain non-UK pensions and QROPS which fall within the appropriate definitions are outside of UK IHT. It is recognised that QNUPS present a number of very attractive tax planning opportunities for the build up of pension funds outside the UK tax regime for both UK residents and non-residents alike. Accordingly, the Guernsey finance industry has now been developing QNUPS products, building upon its QROPS expertise.

As a result of Guernsey's historic pensions specialisation combined with the proactive dialogue with HMRC, Guernsey is now arguably viewed as the jurisdiction of choice for QROPS and QNUPS by clients and professional advisors alike. Both are attracted by Guernsey's modern legal framework, its stable political climate and of course the experienced and qualified pension professionals.

All this ensures that their pensions will be run efficiently and effectively by Guernsey pension providers and not fall foul of HMRC's rules, which could lead to unexpected and costly tax charges.

For more information about Guernsey's finance industry please visit www.guernseyfinance.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.