Originally published in the Guernsey Wealth Management Supplement from Taxation Magazine, June 2010
Alison Vine, Tax Director at Ernst & Young in Guernsey, explains the advantages of establishing or transferring your pension abroad if you are not staying in the UK.
The top rate of income tax in the UK is 50%, contributions into UK pension schemes are qualifying for less and less relief, and the fiscal position of the UK is worrying. Now is the perfect time for someone who has:
- accumulated a pension pot in the UK but is about to leave;
- no longer lives there, or
- is in the UK for some temporary purpose only, to consider whether placing the pension outside the UK would make more sense.
- Why it is a good time to consider a transfer of your pension overseas.
- The advantages and disadvantages of QROPS.
- Other pension plans for the internationally mobile.
- The advantages of Guernsey as a jurisdiction.
As a result of amendments made to UK legislation following the Finance Act 2004 (and presumably bowing under the pressures arising from the EU free movement of capital principle), it is now possible for a UK pension to be migrated to another jurisdiction, without punitive exit charges, and with certain exemptions from UK tax continuing to apply.
For a transfer to be exempted the receiving scheme must be a qualifying recognised overseas pension scheme (QROPS). To be a QROPS an overseas scheme must satisfy certain criteria. It must provide for benefits to be paid to a member such that it qualifies as a pension scheme and it must be established outside the UK. It must be regulated as a pension scheme in the jurisdiction in which it is established and be recognised for tax purposes as such in that territory. The type of scheme must be open to residents of the jurisdiction (i.e. the regime cannot be exclusively for non-residents). At least 70% of the fund must be designated to provide an income for life, and any benefit (including any lump sum) must be payable no earlier than 'normal minimum pension age' (55 since 6 April 2010).
To be a qualifying scheme the scheme must be established in an EU jurisdiction, Norway, Liechtenstein or Iceland. Failing one of these, it must be in a country with which the UK has a double taxation agreement that contains exchange of information and non-discrimination provisions.
Importantly, it is not necessary for the receiving scheme to be in the jurisdiction in which the individual resides or with which he has closest ties; indeed, there may be very good reasons not to transfer a scheme to this jurisdiction.
Other Pension Plans
For mobile executives, who move from country to country with some frequency or who struggle to be regarded as resident in any jurisdiction, an international pension plan is the ideal pension savings scheme. This vehicle is particularly suited to employers who have employees scattered all over the world such that it is difficult to know where to locate the pension scheme.
In these scenarios, having a pension scheme in an independent jurisdiction which is well regulated, such as Guernsey, with recognised pension expertise and legislation which has been in existence (and been relied on) for over 30 years is reassuring. If the jurisdiction also exempts those schemes, and any payments made out of them, from local tax there is an even greater incentive.
Guernsey's Income Tax (Guernsey) Law 1975, s 40(o) provides a legislative framework which has been used by multinational companies for many years to provide flexible pension arrangements. Oft en these may have no restriction on the level of contributions, with the ability to tailor the scheme as a defined contribution or defined benefit scheme. The scheme can also offer flexibility on draw-down, both in respect of the minimum age it can start and the amount which can be taken.
There are few restrictions placed on these schemes; the two most important being that they must be created by employers whose companies carry on business wholly or mainly outside Guernsey, and they must be for the benefit of those working entirely outside Guernsey.
Temporary UK Residents
What about individuals who, perhaps being only temporarily in the UK, have set up pensions overseas? Provided that:
- the scheme member is a relevant migrant member (see below);
- the pension scheme is a qualifying overseas pension scheme (not necessarily a qualifying recognised overseas pension); and
- the member has relevant UK earnings;
then UK tax relief will be granted on the contribution of those earnings (subject to limits). Moreover, relief may also be granted on contributions made by an employer to that scheme.
In Guernsey a s 40(ee) pension scheme would provide an excellent framework for this type of pension. It need not necessarily be an employer-funded scheme. A relevant migrant member is an employee who was not resident in the UK when he became a member of the scheme. The relevant contributions are those made to the scheme in respect of periods when he was resident in the UK, and tax relief is only granted on contributions to the scheme which would have been subject to relief in the jurisdiction in which the member was resident before he came to the UK. Relief will also only be granted if the scheme manager agrees to notify HMRC if there is any payment or circumstance which crystallises an event which needs to be reported to HMRC. Once a member leaves the UK he can continue to contribute to the scheme, but the contributions would no longer qualify for UK tax relief.
For someone moving to or working in Guernsey a retirement annuity trust scheme (RA TS), established under Income Tax (Guernsey) Law 1975, s 157A, might be a suitable vehicle to receive transfers from a scheme elsewhere. This is a personal pension scheme and may also be used for topping up an employer scheme. Contributions (other than approved inward transfers) are restricted according to the levels of earned income and the age of the member. Provided contributions do not exceed the set limits (£13,600 or 15% of earned income for those aged under 40 and 25% or £20,000 maximum for those aged 40 or more years, for 2010) these contributions will be tax exempt. These contribution limits are not compelling incentives to transfer.
However, the fact that an existing scheme can be transferred in and benefits taken which mirror those which would have been permissible in the UK, but with the smaller tax burden of Guernsey's flat 20% income tax rate, could be persuasive.
It is from Income Tax (Guernsey) Law 1975, s 157A that the framework of a QROPS is formed. For the QROPS to receive approved status from HMRC it must be 'recognised' as a pension scheme in the jurisdiction into which the transfer will be made.
The inward transfers into a Guernsey QROPS are therefore transfers into a scheme which was originally devised for, and has functioned for many years like, a Guernsey form of the UK SIPP.
Not Suitable For ...
A QROPS is not the right vehicle for every person who is 'mobile' and is definitely not suitable for someone who, while being 'mobile', has not broken, and does not intend to break, residence in the UK. For someone who is a member of a UK defined benefit scheme, very serious financial, commercial and actuarial consideration should be given as to whether it is sensible to transfer out of that scheme. If an individual does not intend to be abroad indefinitely but is leaving for some temporary purpose only, then a QROPS is not a suitable pension plan.
But a Guernsey QROPS may also not be the best vehicle for everyone who is leaving the UK. If the individual is moving to a jurisdiction which does not understand the concept of a trust this can cause tax problems: the Guernsey QROPS is governed by the legislation for retirement annuity trusts and therefore while behaving like a pension it is legislatively a trust.
The headaches and tax implications of having the scheme, and receiving payments from it into the jurisdiction of residence, should be explored thoroughly before the transfer is made.
Similarly, certain jurisdictions do not favour the Channel Islands (and incidentally Jersey is less experienced in the QROPS arena as the HMRC list of approved QROPS attests) and in these cases a QROPS sited in a tax treaty country or within the EU might be more appropriate. A suitable domestic vehicle must be available in that jurisdiction; a pension scheme which is regulated and recognised in its country for tax relief purposes as a pension, not exclusively for non-residents, where at least 70% of the fund will provide the pension and any benefit cannot be drawn earlier than age 55.
The Advantages of QROPS
Despite the limitations outlined above there are still plenty of reasons why, for certain mobile individuals, a QROPS is a perfect planning tool for retirement. It allows for (not unfettered) freedoms in investment strategy, a greater ability to save and plan for future generations (as an annuity does not have to be bought from a life company), and it allows for future transfers to a 'receiving' QROPS. This means that the pension pot can follow its member around the world, if that is desirable. This might be useful from a currency, time zone, or simply an administrative perspective. On that note, having a QROPS located in Guernsey where for an English person there are familiar banks and investment houses, the currency is sterling, and the time zone suits Europe, can be very appealing.
It is important to note that while there will be no local tax implications for a Guernsey QROPs with non-Guernsey resident members, there could be UK tax implications and there will be reporting obligations on the administrators for at least five years after the UK scheme has been exported. Provided benefits are not paid inappropriately, and certain investments are not made (including residential property) any exposure to HMRC can be kept to a minimum. It is, nevertheless, a prerequisite of gaining approval for the outward transfer that the receiving administrators agree to comply with reporting obligations imposed by HMRC.
Guernsey has been proud of its pension offerings to non-residents for some years now, and the creation of QROPS by HMRC allowed Guernsey to expand this even further. With individuals and finance houses in Guernsey from all over the world our global appeal and reach is now even greater.
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.