Originally published in Private Client Practitioner, December 2009
Guernsey has seen a surge of interest in Qualifying Recognised Overseas Pension Schemes (QROPS) during 2009. Here Alan Chick, Chairman of Richmond Fiduciary Group, explains more about the pension product for expatriates and how Guernsey has grown its reputation as the jurisdiction of choice for its administration.
Guernsey has a strong heritage in offering trust based products as retirement benefit schemes, in particular developing the Retirement Annuity Trust Scheme (RATS), establishing corporate and individual 'international' pension plans, and administering Employee Benefit Trust Schemes (EBTS) and Funded Unapproved Retirement Benefit Schemes (FURBS). This experience meant that the Island was well positioned to take advantage of the significant changes to the pension industry resulting from the UK Finance Act 2004.
One of the main effects of the legislation was to make it possible, from 6th April 2006 (A-Day), for UK pensions to be transferred to any overseas pension scheme which had registered with, and had been approved by, HMRC as a QROPS. Prior to this change it was generally only possible for a person to transfer their UK pension to an overseas pension scheme located in the new country of residence.
Practitioners in Guernsey, and in a number of other jurisdictions, quickly identified the opportunity that these changes offered. However, many practitioners from less well regulated jurisdictions behaved in a way that the HMRC deemed to be against the spirit of the agreements and they promptly took action to stop the abuse. The well publicised removal of Singapore from the list of QROPS approved jurisdictions in 2008 attracted much interest among the industry.
Worryingly for Guernsey, rumours circulated at the time that the Island was also under investigation by HMRC. Wishing to preserve, and indeed enhance, the excellent reputation that Guernsey had built over some 50 years as a well regulated international finance centre, high level representatives from the Guernsey Income Tax Authority entered into a dialogue with HMRC to establish their concerns and once identified, issued specific guidelines to local practitioners on how it was expected QROPS would be administered within the Island. Such swift action has grown Guernsey's reputation as a well regulated QROPS centre so that the Island is now seen by many, including we believe HMRC, as the jurisdiction of choice for QROPS administration.
So, what makes Guernsey schemes themselves so special? These are the main advantages of transferring a UK pension to a Guernsey-based QROPS:
- No requirement to purchase an insurance based annuity;
- Unlike benefits paid from a UK Scheme, benefits from a Guernsey pension scheme can be paid without deduction of tax – although tax may apply in the member's new country of residence;
- On death before age 75 any crystallised element of a UK registered pension scheme will be subject to a 35% tax charge. No such charge applies under Guernsey pension legislation, so provided the member has been non UK resident for 5 or more tax years then these charges will not apply in these circumstances – although again tax may apply in the member's new country of residence;
- There is greater flexibility regarding the method and levels of benefit payments, particularly once the member has been non resident for more than 5 years;
- On death after age 75 any remaining funds in a UK pension scheme cannot be distributed without incurring HMRC charges, which can be as high as 82% of the value of the fund. Assuming a member falling into this category has been non resident for at least 5 years these UK tax charges no longer apply – although tax may apply in the member's new country of residence;
- Any unused assets within the scheme at the time of the death of the member can be either paid to the member's estate or named beneficiaries (potentially including a trust).
These are the main benefits of Guernsey schemes but it must also be highlighted that there are some other considerations which should be taken into account prior to transferring to a QROPS:
- The benefits outlined above are for those individuals who intend to remain UK non resident. Members should consider if a return to the UK may occur e.g. for health reasons.
- By not having to purchase an annuity the member must be fully aware that the pension fund has a finite value which may be exhausted before the time of death; unlike an annuity which is paid until death.
- Be wary of the charging structure quoted by your chosen trustees. Make sure all fees are quoted on a transparent basis, especially if your trustee is using an insurance based platform. It should also be noted that pension assets held via insurance platforms effectively become assets of the insurance company and are therefore at risk if the insurance company fails; unlikely but not impossible. Other suitable platforms exist to provide the same service at far lower costs and without placing the pension assets at any third party risk.
- It should also be remembered that when a pension fund transfers to a QROPS some of the tax benefits which are taken for granted are lost. For example, if commercial property is held, rental income – which is currently received gross by the UK pension scheme – will be liable to withholding tax at the trust rate, currently 40% and increasing to 50% as from 6th April 2010.
These issues should be given some thought before transferring to a QROPS but it remains the case that Guernsey and its schemes offer unique benefits. This is something that Guernsey Finance – the promotional agency for the Island's finance industry – has been increasingly marketing with the industry during this year and will be stepping up further in 2010.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.(http://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.