Guernsey: A Practical Note On How The Proposed Changes To The Pension Tax Laws May Affect You

Last Updated: 6 May 2016
Article by Nicholas Donnithorne and Anna Gray

On 21 August 2015, the Billet d'État XVI 2015 (the "Billet") published the much-awaited proposals to amend Guernsey pensions legislation in reaction to the new "flexibilities" introduced in April 2015 to the UK pensions regime. In this note we have set out more detail on how the changes work and some practical implications.

In a nutshell, the proposals are that:

1. RATS with funds transferred in from overseas pension schemes meeting certain criteria (we refer to these as "relevant overseas schemes")

  • If separately identifiable, these funds may retain benefit rights of pre-transfer jurisdiction
  • Lump sums derived from overseas schemes of up to 30% are tax free

Importance to Guernsey trustees: HIGH

2. RATS with funds transferred in from unapproved section 40(o) schemes

  • If separately identifiable, these funds may retain benefit rights of rules of transferor scheme

Importance to Guernsey trustees: MEDIUM

3. Guernsey residents with benefits in a "relevant overseas scheme"

  • Commutation lump sums from "relevant overseas schemes" will now be subject to Guernsey income tax, except that lump sums up to 30% are tax free

Importance to Guernsey trustees: LOW

Importance to Guernsey residents with "relevant overseas schemes": HIGH

"Relevant overseas scheme" is a term we are using for convenience. For these purposes, we mean a pension scheme:

  • Situated overseas
  • Approved/exempt from income tax in its overseas jurisdiction
  • Providing benefits of similar nature to s150/157A schemes

The Billet includes an explanatory memorandum, a draft Ordinance and an outline of the policy intention (which we refer to as the "Policy Report"). The draft Ordinance covers most, but not all, of the changes outlined in the Policy Report. We can expect in due course further draft legislation covering the outstanding points.

1. RATS: funds transferred from "relevant overseas schemes"

The changes apply to RATS:

  • With funds that transferred at any time (including prior to the Ordinance coming into force) from a "relevant overseas scheme"
  • Which are separately identifiable

Those funds can be used to provide benefits permitted in the "relevant overseas scheme's" jurisdiction. So, if defined contribution funds transferred from a UK registered pension scheme, notwithstanding the usual RATS requirements or even the actual rules of the UK scheme, the RATS could pay up to 100% of these funds as a lump sum.

In addition, it is expected that further legislation will provide detail on the tax treatment of lump sum payments. It looks as if this will allow up to 30% to be free from income tax.

What are the implications for trustees/administrators?

These changes may cause trustees/administrators to have to administer the scheme differently. There are likely to be cost implications, and we recommend that advice is sought.

Points to note include:

  • Preparing the scheme to offer the new flexibilities
    This will almost certainly require amendments to the scheme rules.
  • Administrative complexities

    • The new benefit options only apply to separately identifiable funds derived exclusively from transfers from a "relevant overseas scheme". Therefore, within one member's fund, different benefit options may apply.
    • If Trustees do not already do this, they would need to account separately for the inward transfer funds in order to be able to offer the new benefit options on those funds.
    • The new benefit options are those permitted in the pre-transfer jurisdiction at the time the RATS pays out the funds, so:

      • This is wider than under the transferor scheme rules; and
      • As laws in the pre-transfer jurisdiction change from time to time, the rights attaching to these funds may also change.
    • Trustees now have the prospect of needing to be familiar with what is "permissible" under numerous jurisdictions and keep this knowledge up to date. For example, for transfers from the UK, the complexity of UK pension and tax laws is such that careful advice should be sought.

2. RATS: funds transferred from unapproved s40(o) scheme

Much of the above on transfers from "relevant overseas schemes" apply except that the rights retained post-transfer are those in the transferor scheme rules.

Guernsey residents with "relevant overseas schemes"

These changes apply where:

  • a Guernsey resident
  • has a "relevant overseas scheme"
  • which pays a lump sum in exchange for or in lieu of a pension (often referred to as commutation)

This lump sum will now be subject to Guernsey income tax EXCEPT that there is a 30% tax free allowance. To calculate the 30% you need to add the value of the lump sum to previous lump sums paid by the scheme, and work out what percentage this constitutes of the total value of funds as at the date of payment.

Points to note:

  • Is the scheme a "relevant overseas scheme"?
    Whilst it is clear from the Policy Report that the draftsman intended this definition to include UK registered pension schemes, a UK registered pension scheme offering the new "flexibilities" under UK tax law does not clearly come within the test. Whilst our view is that the better analysis is that a UK registered pension scheme is a "relevant overseas scheme", this is not clear cut.
  • Is the payment actually a lump sum payment?
    For example, in the UK, a member accessing 100% of his or her accumulated pension in a single payment may either be receiving what the UK legislation calls an "uncrystallised funds pension lump sum" or using "flexi-access drawdown". The UK legislation categorises drawdown payments as pension rather than lump sums. The proposed new Guernsey legislation only applies to "lump sums" and it is not therefore clear whether a drawdown payment would be classed as a "lump sum" for these purposes.
  • Does the lump sum come within the 30% tax-free allowance

    • Individuals will need to know what lump sum payments have already been made by the scheme.
    • What about lump sums that are not paid by way of commutation (in exchange for or in lieu of pension)?

      The new legislation specifically provides that commutation lump sum payments are income, subject to tax. Therefore, it looks as if a lump sum which is not a commutation lump sum (this is a feature of some UK public sector defined benefit schemes in particular) would, presumably, not be subject to Guernsey income tax. However, because of a quirk in the drafting, such free-standing lump sum may in some cases count as part of (and therefore use up) the 30% tax-free element.

The proposed changes to the pension tax laws are welcome, but there remains some uncertainty as to the practical implications. Additionally, trustees of RATS receiving transfers in from "relevant overseas schemes" may need to amend their administrative practice and consider obtaining detailed advice on the laws of jurisdictions other than Guernsey.

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.

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