Unfortunately, there is a huge misunderstanding as to what recognised overseas pension schemes (ROPS, formerly referred to as “QROPS”) and qualifying non-UK pension schemes (QNUPS) are. For a start, they are not in themselves products, or for that matter, “solutions”.
What they are: pension schemes established in an overseas jurisdiction, which aim to comply with UK legislation that determines whether they can be considered acceptable arrangements under UK tax law, to allow the transfer (in the case of ROPS) of a UK ‘relevant transfer fund’ to such an arrangement, without giving rise to an “un-authorised payment charge” or a “scheme sanction charge”.
As HMRC states on its website: “HM Revenue and Customs (HMRC) can’t guarantee these are ROPS or that any transfers to them will be free of UK tax.”
The ROPS listed on HMRC’s website have “self-certified” to HMRC that they comply with the various statutory instruments and legislation. They are not “approved” or “regulated” by HMRC, even though this is claimed or implied by a large number of unregulated international sales organisations.
On top of this – and what worries me even more than how little ROPS and QNUPS are understood by the market – is that a number of providers in some jurisdictions do not themselves know what compliance with UK regulations means.
For example, Australia and Canada. Most Australian Superannuation funds, when asked if they complied with the ‘minimum age test’ introduced in April 2015, stated that they did, and remained on the list. As it turned out, and was confirmed by the Secretary General of the Law Council of Australia in a June, 2015 letter to HMRC, they didn’t.
“The Superannuation Committee understands that the new rules create a real doubt about whether Australian superannuation funds can continue to meet the conditions now needed to qualify as a QROPS,” it said.
Effectively, all Australian Superannuation Schemes, knowingly or not, had submitted erroneous “self-certification” documents to HMRC, thereby putting all those transferring their pensions to Australia at risk of “un-authorised payment charges”. A mass de-listing of Australian ROP schemes, of course, soon followed.
A similar scenario subsequently occurred in Canada. In 2016, HMRC wrote to all Canadian RSPs, asking if they complied with the Pensions Age Test, having been informed over a year earlier that there was an issue with the local Canadian legislation.
While the Canadian RSPs thought they were compliant, it seems they hadn’t actually read the details of the legislation, and, over a period of months, Canada was removed for the ROPS list.
‘Not products but structures’
What ROPS and QNUPS are is structures, not products – structures which, in certain cases, provide the right solution to an individual’s tax planning requirements.
A QNUPS, for example, is a form of overseas pension scheme available to UK citizens who reside permanently outside of the United Kingdom, or in the UK.
In order to “qualify”, a scheme needs to be compliant with Statutory Instrument 51 of 2010. However, unlike ROPS, there is no ‘list’ or ‘self-certification’ process, it is up to the adviser and member to ascertain as to whether the scheme will comply.
The sad fact is that it will not normally be until the pension scheme member dies that it will be known whether HMRC will accept the structure, and exempt the assets held within it from Inheritance Tax (IHT). If HMRC thinks that the contract was established for any other reason than providing a pension in retirement, there is every chance that it will not benefit from an IHT exemption.
And the problem is that too often, QNUPS – which are a useful tax planning tool for the small minority who fit the criteria – are being mis-sold as an IHT protection vehicle to the unwary.
QNUPS set up for those already in retirement, “contributing” to the family home etc, will just not work, and the pension scheme members’ beneficiaries will be massively disappointed when this ultimately is revealed to be the case.
What this all leads up to is that individuals must get advice from a suitably qualified and regulated person/firm (preferably with the right professional indemnity (PI) insurance); and they need to be wary of statements on firms’ websites, and claims concerning their regulated status.
If one were to read the following, for example, they might think they were dealing with a regulated firm.
“XXXXXXX XXXX Management is an authorised representative of xxxxx. Xxxxx is authorised and regulated by the Insurance and Pension Funds Supervisory Authority in Portugal (“ASF”) with registration number xxxxxxxxxxx and subject to limited regulation by the Financial Conduct Authority (“FCA”) number xxxxxxxx.”
However, if you were to go to FCA website, it says: “Insurance Mediation – firm that offers or sells insurance products and services. (Not pension advice nor investment advice)”.
Click on “Appointed Representative” on the FCA website, and xxxxxxx xxxx Management does not show. This means that anyone who deals with them is effectively dealing with an unregulated firm.
Unregulated firms and those operating outside of the UK are also not obliged to fully disclose fees and commissions under the current regulations. This will change, we trust, with the introduction of MiFID II in 2018, and the delayed Isle of Man disclosure rules now due to come into force in 2019.
Upcoming regulation will benefit the industry and transferors
The world is moving to a more regulated, compliant and transparent environment, and the trustee businesses which provide ROPS and QNUPS need to be ahead of the game.
Two examples of how countries can help the industry and transferors are Malta and Gibraltar. Malta already imposes the following regulations (since 2015):
1.3.4 The Scheme may appoint an Investment Manager, to carry out the investment management function of the Scheme, independent from the entity carrying out the custody function in connection with the Scheme.
1.3.5 The Investment Manager of the Scheme may either be:
(a) the Retirement Scheme Administrator if it is not undertaking the custody function for the Scheme itself and if duly licensed under the Act to carry out investment management services for a Scheme; or
(b) an entity licensed to carry out investment management services to Schemes under the Act; or
(c) an investment manager established in another Member State or EEA State and duly authorised for this activity in accordance with Directives 2009/65/EC,
2004/39/EC, 2006/48/EC, 2002/83/EC and 2011/61/EU, as amended from time to time, and which has passported its services in Malta; or
(d) any other entity which is subject to an equivalent level of regulatory supervision in the jurisdiction where its operations take place, having the business organisation, systems, experience and expertise deemed necessary by the MFSA for it to undertake investment management activities.
1.3.6 The Scheme may appoint a Custodian, independent from the entity carrying out the investment management services in connection with the Scheme.
1.3.7 Where the assets of a Scheme are entrusted to a Custodian for safekeeping, the
Custodian of the Scheme shall either be:
(a) the Retirement Scheme Administrator if it is not undertaking investment management function for the Scheme itself and if duly licensed under the Act to carry out custody services for a Scheme; or
(b) an entity licensed to carry out custody services to Schemes under the Act; or
(c) custodians or depositaries established in another Member State or EEA State and duly authorised for this activity in accordance with Directive 2004/39/EC or Directive 2006/48/EC, or accepted as a depository for the purposes of Directive 2009/65/EC, as amended from time to time, and which has passported its services in Malta; or
(d) any other entity which is subject to an equivalent level of regulatory supervision in the jurisdiction where its operations take place, having the business organisation, systems, experience and expertise deemed necessary by the MFSA for it to undertake custody services.
1.3.8 A Scheme may appoint an Investment Adviser responsible for the provision of investment advice in relation to the assets of the Scheme.
1.3.9 The Investment Adviser of a Scheme may either be:
(a) an entity licensed to provide investment advice to Professional Clients under the Investment Services Act (Cap.370); or
(b) an investment adviser established in another Member State or EEA State and duly authorised for this activity in accordance with Directive 2004/39/EC, as amended from time to time and which has passported its services in Malta; or
(c) any other entity which is subject to an equivalent level of regulatory supervision in the jurisdiction where its operations take place, having the business organisation, systems, experience and expertise deemed necessary by the MFSA for it to undertake investment advice.
And Gibraltar enacted the following in 2017:
Due diligence on investments
18. Prior to investing any part of a member’s fund in an investment, either on the instruction of the member or a third party acting on the member’s behalf, a licensee must carry out due diligence to determine whether the proposed investment is-
(a) suitable for retail consumers; or
(b) unsuitable for retail consumers and suitable only for professional clients or eligible counter-parties.
Prohibition on certain investments for retail consumers
19.(1) A licensee must not invest any part of a member’s fund whether on the instruction of the member or a third party on the member’s behalf unless-
(a) it has carried out due diligence on the proposed investment to satisfy itself that the proposed investment is suitable for a retail consumer
(b) it is satisfied, on reasonable grounds, that the proposed investment is suitable for a retail consumer
Information to consumers
(c) details of charges for the personal pension scheme, including-
(i) the total price to be paid by the consumer to the licensee in connection with the scheme or any ancillary service, including all related fees, commissions, charges and expenses, and all taxes payable via the scheme or, if an exact price cannot be indicated, the basis for the calculation of the total price so that the consumer can verify it; and
(ii) notice of the possibility that other costs, including taxes, related to transactions in connection with the scheme may arise for the consumer that are not paid to the licensee or imposed by it.
These regulations require providers to adhere to a strict set of rules, which in an ideal world will lead to better consumer protection and security of pension assets. It is all about implementation.
As I trust I’ve made clear, those in the pension transfer industry who are still fighting to find loopholes in the legislation, dealing with unregulated advisers, paying and charging hidden fees, commissions and retrocessions will soon find themselves fighting a losing battle, if they haven’t discovered this already.
The time for the industry to modernise and join the 21st century is now.
TMF International Pensions is proud to have been a leading proponent of this modernisation over the last 10 years.