The Isle of Man is now leading the way in providing tax efficient pension schemes for overseas workers and expatriates with deferred UK pensions. Prior to UK A-Day (April 2006 when the British Government brought in sweeping changes to the UK pensions system) pension transfers from the UK to the Isle of Man, along with other overseas countries, operated under a long-standing reciprocal agreement, which relied upon the person's tax residence having moved from the UK to the Isle of Man.
The effect of A-Day was to tear up all such reciprocal agreements and replace them with the current QROPS Regime. Any pension transfer can be made from a UK scheme to an overseas scheme at any time, provided only that the latter is registered with HMRC as a Qualifying Recognised Overseas Pension Scheme.
Global client base
One leading company operating in this sector, consulting actuaries and pension scheme providers, Boal & Co, has many such schemes that now hold QROPS status and demonstrate the breadth of international appeal. Already this year, UK/Isle of Man pension transfers have been completed for clients in places such as the USA, Spain, Thailand, Dubai, Japan and Indonesia – as well as the Isle of Man.
What sets Isle of Man schemes apart is their regulated nature, and a pragmatic approach to scheme benefits. Key drivers are the ability to avoid having to buy an annuity, to keep investment control like a SIPP, to retain funds on death, and to face only 7.5 percent tax on death. There is also the potential for some tax savings on the pension in payment.
Boal & Co's Managing Director, Gary Boal, says it's the approved status nature of Isle of Man QROPS that is key to their success – and is the fundamental issue at the heart of providing proper pension provision for expatriates and non-doms.
'The first point to note is that individuals who transfer UK pensions to an Isle of Man pension never have to buy an annuity - never ever,' he stressed. 'This means that funds can be retained within the member's wealth on death, and passed down to the member's beneficiaries or into the member's estate. The member is able to draw down pension on a relatively flexible basis and keep it invested as they wish – whether on deposit, in shares or in funds. There is no distinction whether the member is before or after age 75 – draw down is a lasting provision.
A lasting solution
'Secondly, unlike certain other international jurisdictions which have promised tax-free transfers for UK pensions or hinted at an ability to achieve ''pension busting'', customers transferring their UK pensions to Isle of Man schemes may be confident of a lasting solution. For one thing, all companies who provide pension administration or trustee services in the Island have to be authorised and registered with the Insurance and Pensions Authority. This regulated environment is supported by openness and clarity in dealing with tax – Isle of Man pensions are subject to Isle of Man tax, currently at 18 percent, when they come into payment. But this is offset by the ability to take up to a 30 percent tax-free lump sum and by a personal allowance.
'However, it is a fundamental requirement of any scheme used for UK pension transfers that pensions paid from the scheme are subject to local tax: so tax-free is simply not an option. What is possible, though, is low tax, a wide range of investment choice and flexibility on the nature and form of eventual pension benefit.'
Unlike some of our competitors, he points out, the Isle of Man has had the boldness to turn the issue of tax into a positive element of the scheme's design. What the Island's tax authority has done is attach tax to both domestic and international pensions in a way that, far from being seen as anti-competitive, is highly attractive in that it clarifies one of the central issues of requiring tax to be deducted at source.
'This is particularly important where pensions are being transferred after being built up in the UK. Isle of Man schemes make it clear that when pensions come into payment, they are subject to Isle of Man tax. This application of tax satisfies the requirements of the UK Revenue.
Open and liberal
'A transfer of UK pensions is possible provided the Isle of Man scheme is registered as a QROPS with HMRC and honours the specified reporting requirements to HMRC. For many expatriates and non-doms with pensions left behind in the UK, pension transfer to an Isle of Man scheme can provide huge advantages, with no strings attached.'
The Isle of Man's move towards seeking a series of bi-lateral double tax agreements with other jurisdictions – including Spain, with its huge pool of British expatriate residents – is welcomed by Gary Boal as another demonstration of the Island's ability to tackle important tax issues head-on. By clearly discharging any local tax liability, the Isle of Man schemes avert the threat of tax bills being incurred from both home and abroad.
'The Isle of Man is offering proper, regulated pensions in a lasting tax efficient environment,' explained Mr Boal. 'Unlike UK pensions, which have been subject to huge tax changes in recent years, and the effective, politically motivated application of an 82 percent tax rate on pension funds remaining on death, the Isle of Man schemes have only a 7.5 percent tax rate on death of the last member - and it is possible to bring in additional family members to keep a scheme running.'
Mr Boal continued: 'QROPS conditions impose reporting and other obligations on the overseas administrator to HMRC.
However, these and some conditions – such as Member Payment Charges – fall away after five years of UK nonresidence. Once the overseas transfer has happened, if the member has been UK non-resident for five years (and is non-resident when the pension is paid) there are no reporting requirements.
'Isle of Man personal pensions can obtain contracted-out approval, and we now have a choice of master trust-based personal pension arrangements to which UK protected rights can be transferred. As with the main pension fund, protected rights can also operate on a draw down basis in retirement.
This new breed of Isle of Man based international pension is aimed primarily at British expatriates and non-doms – individuals who have in the past built up UK pensions but are no longer UKresident, who have worked in the UK in the past and accumulated UK pension funds. They are also available to the local Isle of Man market, including wealthy individuals who physically relocate from the UK – though this is no longer a prerequisite for an Isle of Man transfer.
Successful life sector
Isle of Man pension schemes operate in a well-regulated environment introduced by the Isle of Man Retirement Benefits Schemes Act 2000 and Subordinate Regulations. Scheme administrators and trustees must be authorised by the Insurance and Pensions Authority, the same regulator as for the Island's highly successful offshore life assurance sector. The Isle of Man Treasury believes its offshore pensions sector will emulate the success of the offshore life sector, which, after 25 years of expansion, now boasts funds under management of more than £35 billion.
'First and foremost, QROPS take UK pensions out of the UK system of pension rules. This has a number of benefits, including enabling pension funds to be passed down a generation – unlike the very harsh regime in place in the UK - with only a 7.5 percent tax on eventual wind-up. In addition, schemes have a variety of other benefits, including allowing a higher, 30 percent tax-free lump sum as well as a wider investment choice, including investments that are not permissible in UK SIPPS.
'Given the opportunities that the Island's pension framework provides – most particularly for moving nonresidents' UK pensions to a more flexible, tax-efficient environment – and given the professional expertise and range of schemes now available, Isle of Man Pensions Plc is now very much open for transfer business,' added Gary Boal.
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