Originally published in International Adviser, QROPS Supplement, March 2010
With a number of jurisdictions now offering QROPS, David Piesing from Praxis Fiduciaries and Stephen Ward of Premier Pension Solutions assess the relative benefits and which one comes out on top.
It seems like an eternity since QROPS became available back in April 2006. Four years on prospective client now have plenty of schemes and jurisdictions from which to choose.
The choice for most people is from schemes operating in jurisdictions which are open to both residents and non-residents.
The main markets for QROPS transfers are:
- Isle of Man
- New Zealand
Malta will soon come on stream as well. We have not included Hong Kong as there are only 10 active schemes on the HMRC list and those are mainly occupational ones.
Here we assess these main jurisdictions and consider:
- benefit flexibility for members who have been non-UK resident for at least five complete tax years;
- investment flexibility;
- ease of transfer in and out.
Benefits for life
The key advantage of a QROPS when compared with a UK scheme is not having to buy an annuity by age 75. The jurisdictions on our list allow the fund on death to pass to nominated beneficiaries with no UK inheritance tax (IHT) liability.
Maximising benefit flexibility may require an onward transfer to a non-QROPS mirror scheme. This is possible without tax implications if the QROPS is non-investment regulated.
Most Guernsey QROPS have confirmed non-investment regulated status. Gibraltar, the Isle of Man and New Zealand QROPS, as well as those from Malta, generally meet this condition. Guernsey QROPS may allow access before age 50 (55 from 6 April, 2010) as a loan of up to 25% of the fund. Trustees can allow flexibility through a temporary annuity. Full commutation remains possible where the fund is small.
New Zealand schemes are not subject to the 70% income for life rule because of how they navigate the HMRC QROPS conditions. This allows capital payments from the fund. The lump sum from Isle of Man schemes is up to 30% of the fund. Guernsey (currently restricted to 25%) is expected to match this figure soon. Maltese schemes restrict lump sums to 25%, as do Gibraltar's.
All jurisdictions offer investment flexibility. Member directed investment is generally avoided as schemes might otherwise be considered investment regulated with indefinite reporting to HMRC. Some schemes have allowed investment in residential property yet surprisingly still claim they are not investment regulated with no tax charge arising.
For the majority, traditional forms of investment are sufficient. More exotic choices are best delivered in a non-QROPS, such as a Qualifying Non-UK Pension Scheme (QNUPS), having received a transfer value from a QROPS without triggering an unauthorised payments charge after completion of the five-year non-residency period by the scheme member.
The fund accumulates free of tax (except tax deducted at source on some dividend income) in all countries on our list except New Zealand. Fund taxation rules in New Zealand are complex, and are made on a comparative-value basis or assuming a 5% pa 'fair return', with the calculation of asset valuations required in NZ$. But the government is expected to announce it is exempting pension funds.
Isle of Man schemes deduct local tax on pension income, typically at 18%. This creates issues unless the Isle of Man has a double taxation treaty with the country where the member is resident. For example, a Spanish resident can neither offset nor reclaim Isle of Man tax deducted. On death, it applies a 7.5% IHT charge with a £100,000 cap.
The cost of QROPS
There is great variation between schemes and jurisdictions, and between providers within jurisdictions. However, there are two main models:
- A packaged QROPS product with a menu of preapproved investment funds and management houses.
These are available in Guernsey, Isle of Man and New Zealand. Some claim to be fee-free. This is achieved through retrocession commissions which are at best only partially disclosed. In a new era of transparency and commission disclosure, it is hard to see how these schemes will be able to be marketed as such in their current form.
- A transparent one-off setup fee and an annual fee, sometimes accompanied by a service-driven fee menu. This is found in all jurisdictions except New Zealand.
Some Isle of Man schemes can appear to be slightly cheaper than Guernsey ones, but the menu approach requires careful comparison. Some Gibraltar schemes seem comparatively expensive but volumes are currently small. Maltese schemes are expected to be priced at Guernsey levels. In New Zealand, where the fund remains in place for the longer term, scheme pricing can involve an annual charge of around 1.65% but no setup charge.
Ease of transfer
A look at both directions of transfer is important because personal circumstances can change. UK schemes give members the right to transfer, while overseas schemes do not. The transfer experience can vary from simple to horrific, although whether that is down to the jurisdiction or the provider is arguable. UK schemes can be freely transferred to any overseas scheme which is registered with HMRC as a QROPS.
QROPS providers in all countries generally deal well with the transfer process, which takes anything from a few weeks to several months. Transfers out of QROPS can be expensive. Some schemes apply seemingly punitive exit fees even though their service may have fallen short.
In addition, some QROPS do not state at outset a freedom to transfer out to QROPS in other jurisdictions, even where such transfers are expressly permitted by local law and by the tax authority of the existing scheme, and the new scheme is able to acceptthe transfer.
So which is the best jurisdiction for QROPS? Gibraltar is regarded as expensive, while the jury on Malta – a brand new entrant to the market – is still out, though it has considerable potential and an excellent double tax treaty network.
New Zealand has the most flexible benefit regime, but distance complicates the transfer process and the fund is taxed in a way which includes exposure to currency risk. The Isle of Man can be relatively low cost, but has an irritating exposure to local taxation which has deterred many potential users.
Guernsey ticks all the right boxes, and has sought HMRC input and guidance to prevent potential abuse by its sizeable community of QROPS providers. Ongoing dialogue with HMRC has benefited its status as arguably the world's leading QROPS jurisdiction.
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.