Originally published in the International Adviser, QROPS Supplement, September 2011.
The crisis caused by budget deficits – and the austerity measures being brought in by governments in response – means that IFAs might need to reconsider pension options for their clients, says Rob Shipman, Managing Director of Sovereign Trust (Channel Islands).
A major concern affecting the global economy currently is the budget deficits that are threatening to destabilise the eurozone, and all European countries are looking to reduce their deficits – or national overdrafts.
As Guernsey is responsible for its own financial affairs, here we are able to consider these issues from a different perspective and, while not immune to the financial crisis, we have to a large extent been cushioned.
But what happens in the EU really does affect us. Of course, we are mainly concerned – for different reasons – by developments in the UK, but we cannot ignore the bigger picture because of the danger that the financial contagion will spread.
All EU governments must scale back their budgets urgently to alleviate the dire straits in which many find themselves.
Impact of the crisis
In order to bring about a future of more balanced government debt compared with revenue, fundamental – and politically controversial – change will be required. But what will this mean for the ordinary citizen?
Essentially there are two ways that the financial crisis is going to affect every resident of those countries where substantial deficit reduction programmes are a necessity.
Firstly, government spending cuts will mean a reduction in benefits for many, with less generous allowances and tax breaks available – look at the recent announcements in the UK, with more to follow across Europe.
Secondly – although this is really only the other side of the same coin – taxes will almost certainly have to increase for most citizens. Rising taxes are never popular but, when combined – as they will be this time – with major reductions in public spending, we can expect to witness serious public commotion when the harsh reality begins to bite.
Politicians across Europe are going to need nerves of steel as they confront an increasingly uneasy electorate.
What can be done?
Another tactic already announced or being actively considered in some countries – for example, the UK, France and Greece, with more to follow – is to increase the official retirement age, long debated as a necessary response to shifting demographics and ageing populations.
Governments are being forced to act far sooner than had been predicted, which will be deeply unsettling for the millions who will find their long-term plans disrupted. But is there anything individuals can do about it?
In a word – pensions. For those fortunate enough to have made some provision for their future financial security, now might be a good time to review those arrangements to ensure available opportunities are being maximised. Given the present state of stock markets and their recent history, is your future material comfort as assured as it was on the day you first made your plans?
It is against this background, now more than ever before, that adequate provision for retirement should be made on a 'must do as soon as possible' rather than 'I will get round to this one day' basis. One can no longer rely on any government to provide for everyone's financial security in retirement.
Hence we see a definite place for Qualifying Non UK Pension (QNUPS) provision for high net worth and international clients, whether they be resident in the UK or overseas.
The QNUPS acronym came into being as a result of the QNUPS regulations in 2010 – the UK's response to the fundamental EU principle of free movement of capital, enshrined in the EU Pensions Directive 2003. This requires the equalisation of pension treatment for non-domestic compared with domestic pensions. Once again, the UK is one of the first countries to follow this particular set of EU rules.
QNUPS and IHT
The legislation is not entirely new, nor is the underlying concept, which should give advisers some confidence in the product. The requirements of the QNUPS regulations are substantially the same as those for a pension scheme to be a Recognised Overseas Pension Scheme (ROPS).
Prior to 6 April 2010, such schemes were not afforded any special IHT treatment. Accordingly the pension fund potentially formed part of the member's estate for IHT purposes (the fund value immediately prior to his death). This could result in a 40% IHT charge to the extent that the pension fund and the member's other assets exceeded the value of the nil rate band on death. These provisions were obviously discriminatory against overseas schemes compared with their UK equivalent, hence the change to the relevant legislation in 2010.
Several articles have appeared over the past 12 months stating that the use of a QNUPS is a simple way to avoid IHT, but this is bad advice. There are dangers arising if an adviser simply sets up a QNUPS to avoid UK IHT for their client where there is no other motive for doing so – as the chances are that, upon the member's death, HMRC will look at the arrangement and simply view it as an IHT avoidance tool.
UK anti-avoidance legislation may well be used to see through the arrangement and assess the member's estate, as if the assets were still in the member's personal name, the appropriate tax would be charged.
QNUPS are a very attractive retirement benefit planning tool for clients that avoid some of the constraints otherwise imposed by an equivalent UK domestic pension. Examples include allowing a greater choice of assets that may be held in the pension; more flexible rules on taking an income from it; and no cap on the level of contributions that can be made to the pension. Members are able to borrow from their QNUPS fund to purchase personal assets rather than being constrained by trying to borrow from a bank. Naturally this area is subject to strict conditions. Upon death, any residual value is paid to beneficiaries chosen by the member.
Tranquility in Guernsey
In order to be a QNUPS, certain conditions must be fulfilled by the scheme. These include providing an income upon retirement; opening the scheme to the local population in the jurisdiction where it is established; and that it is recognised for tax purposes in that jurisdiction.
Sovereign's QNUPS is the Tranquility Personal Pension Plan, a domestic 157a Guernsey pension scheme. Sovereign considers Guernsey to be the most appropriate jurisdiction for its international pension services owing to its well regulated nature and its international standing as a leading offshore financial centre; our excellent pension legislation dates back to 1975, well before most offshore jurisdictions even considered the need for international pensions. All of this gives our clients the confidence they are seeking in such uncertain times.
We are all getting older and should all be concerned about our pension – be it a government or 'state' pension, a private arrangement, or perhaps a combination including the use of QNUPS as described above.
The way governments tackle the present financial problems – and the results of these actions – are going to be of fundamental importance. So, stay abreast of the news and, if you have any cause for concern, seek professional advice at the earliest opportunity.
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.