A number of UK financial advisers are sounding an alarm over whether it is safe to permit clients to transfer their UK pensions into Canadian pension schemes, given the UK's requirement that foreign pension fund administrators assert that their scheme won't permit scheme members who transfer their UK pensions abroad to access their pensions before the age of 55.
Until last year, the UK didn't interfere when individuals transferred their pensions - typically via a "qualifying recognised overseas pension scheme", or QROPS, a pension transfer structure first introduced in 2006 - to a jurisdiction that allowed its own citizens and tax residents to access their pensions before age 55, even though it warned that UK pensions must not be accessed in this manner.
But then, evidently concerned that some people might be looking to move their pensions to jurisdictions that permitted such early withdrawals on purpose, with the intention of gaining access to their money, HMRC last year moved quickly to implement a new "Pension Age Test". The legislation was passed on 17 March 2015, and took effect on 6 April.
As a result, anyone who is found to have moved their pension to a scheme that would permit someone to access their pension funds before their 55th birthday, directly or indirectly, now faces a significant penalty, known as an "un-authorised payment charge", levied against them by HM Revenue & Customs.
This is the case, pension industry experts point out, even if they themselves never actually attempt to access their pension early, or indeed, in theory, even if no one does - all that matters is that it is theoretically possible.
Immediately after this regulatory change took place last year, a number of jurisdictions saw their ability to take pension transfers from the UK all but disappear. In Australia, the hardest-hit of the countries popular among Brits looking to move their pensions abroad, the number of QROP schemes able to take UK pension transfers immediately fell to just one, from 1,653.
(Now, though, more than 100 Australian schemes claim to be compliant, as these restrict those joining their schemes to those age 55 or older, although some UK pension experts question whether some of the schemes actually meet the UK's official statutory requirements for such transfers.)
In addition to introducing the new pension age test, HMRC has also begun referring to UK pensions being transferred abroad as "ROPS" rather than QROPS, to remove the suggestion that they are "qualifying", because it is seeking to drive home the message that it is making no judgments about any schemes in advance. This means that the possibility that it might take action against such schemes at a later date remains open.
‘Speaking out to highlight issue'
The advisers who spoke to International Investment about their concerns over UK pension transfers to Canada said they were doing so because they wanted to highlight the issue.
They say they are being pressured by clients who are asking them to approve such transfers, but are extremely wary of being held liable for the consequences, should the Canadian schemes into which these individuals transferred their pensions prove not to meet HMRC's requirements.
They also said they are frustrated that HMRC has declined to provide guidance on the matter, even when asked to do so.
Asked about this, an HMRC spokesman said: "Pension schemes need to meet the requirements to be [a] QROPS to receive tax-free transfers from registered pension schemes. If the pension scheme does not meet the requirements, then it is not a QROPS, even if it has notified HMRC that it meets the requirements.
"Pension schemes may be able to change their rules to meet QROPS requirements, so it may not be possible to say that all pension schemes in a particular country do not meet the requirements.
"If an individual member is entitled to payments from their transferred funds before age 55, and an individual gives an undertaking not to request payments, the pension scheme will still not meet the Pension Age Test if the undertaking is not legally enforceable."
‘Uncertainty lies in the written rules'
Jim Bell, director of Serenus Consulting, a Cheshire, England-based advisory business which specialises in looking after Canadian expatriates, is one of the UK-based advisers who doesn't feel comfortable enough with that answer.
"We're being told by most of the Canadian banks, which are the main providers of Canadian retirement plans, that in their view there's no problem, they are policing the pensions they look after to make sure that no one who has made a transfer from the UK is able to take their money before the age of 55," says Bell, who is himself Canadian.
"[But] if you look at the Canadian pensions involved, which are called Registered Retirement Savings Plans (RRSPs), even though they may be policed to prevent a breach, the legal rules of the plans do allow direct and indirect access in certain circumstances," Bell adds.
"Now, the Canadian banks are saying that they will prevent this internally in their systems, but the uncertainty lies in that, according to HMRC, it is the written rules of the schemes that matter, and not how they are administered.
"As a result, the Canadian banks have been seeking direct answers from HMRC, to confirm that what they are doing is correct, but so far they have received nothing but silence.
"The Royal Bank of Canada, which is the twelfth largest bank in the world, felt so uneasy about the situation that they actually pulled out of providing QROPS.
"It is an incredible situation, when the largest bank in a country as regulated and compliant as Canada, cannot get an answer from HMRC.
"The vast majority of other Canada institutions believe they are complying in full because HMRC is fully aware of how Canadian pensions work, and they have not taken steps to close them down, and continue to approve them on the list every year."
Bell adds that he himself has been "seeking guidance" from HMRC on the Canadian pension transfer question for more than nine months, but "so far, every e-mail I have sent has gone unanswered".
He adds: "If there is a problem in the future, HMRC will have a difficult time explaining why they did nothing to prevent it."
Bell says he has been exploring the possibility of being able to transfer the UK pensions of individuals retiring to Canada to Malta - which he thinks has a particularly good regulatory infrastructure for pension fund administration - as an alternative to transferring them to Canada, but thus far this too has proved problematic.
"Under Canadian pension law, a pension keeps its [tax] exempt status if the pension in question stays in the country in which it was amassed. And for such purposes they don't consider the European Union one country, regardless of the ideas of free movement of financial goods and services.
"The second it leaves the UK, it loses its exempt status, and the whole thing is taxed as income in Canada."
Bell is holding off on pushing this matter until after the UK vote on whether to remain a part of the European Union, which will take place on 23 June.
An RBC spokesperson said they were unable to discuss why the bank doesn't have a Canada-based ROPS scheme on the current HMRC list, or find anyone there who would be able to.
The Royal Bank of Canada did have one scheme - the RBC Insurance Guaranteed Investment Funds - on HMRC's 15 April 2015 ROPS list.
‘Pressing for information'
Also seeking hard and fast answers on the subject of UK pension transfers to Canada - and getting none, he says - is Geraint Davies, managing director of Montfort International, a Guildford, Surrey-based firm which specialises in helping Britons and others with UK pensions to transfer them to such countries as Australia and New Zealand, when they are moving overseas to live.
"We're pressing for this information, but we just can't get it," Davies says. "That makes us very concerned, as they just won't answer the question.
"And for this reason we think any adviser who is signing off on a pension transfer to Canada should be aware of this potential issue."
Davies shares Bell's concern that it's not enough for the Canadian RRSPs to say that they can keep their UK-origin pension scheme members from access their pension before the age of 55, because under Canadian law, at present, they can.
"They say they can ‘mitigate' the chance of accessing the pensions before the age of 55, but what are the chances that HMRC is going to accept that, the idea of ‘mitigation'?", Davies says.
"We at Montfort say ‘mitigate' is not good enough - if you go by what happened in Australia, then Canadian schemes have got to be examined. We need to see the word ‘prohibit'.
"When the Australian problem blew up, a plea went out from lawyers representing the superannuation industry in Australia, asking HMRC to grant Australia an exemption.
"Canadian schemes seem afraid to do the same."
Davies and others point out that although there are still some 65 Canadian schemes listed on HMRC's official list of Recognised Overseas Pension Schemes, which is updated every two weeks, this is down from 95 on the list that was published on 15 April, 2015, just before HMRC introduced the Pension Age Test, and then ruled that all but one Australian scheme failed to meet its new standard.
For Bethell Codrington, global head of pensions at TMF Group, a London-based pension fund administrator, the mystery is why HMRC has not acted to remove the Canadian schemes that don't meet its requirements from its ROPS list, they way it did last year with the 1,652 Australian schemes it deemed unfit.
He says he informed HMRC in June 2015 that Canada's RSPs didn't meet the requirements, and in doing so, included an extract from the Bank of Montreal's RSP documents.
"The extract stated, in part, that ‘at any time before the maturity of the plan, the planholder may instruct the trustees to make a withdrawal from the plan, or to make a transfer on behalf of the plan holder, [of] all or part of the fund, in accordance with subsection 146(16) of the Act, to another registered retirement savings plan, a registered retirement income fund or a registered pension plan," Codrington quotes the Bank of Montreal documents he forwarded to HMRC as stating.
"One would assume that when HMRC are provided with evidence that schemes do not meet the requirements, they would act," Codrington adds.
"They did with Australia, why not Canada?"