The number of UK pensions transferred overseas as Qualifying Recognised Overseas Pension Schemes thus far this year is a third down from the same period in 2015, according to HM Revenue & Customs.
The reduction of transfers from 20,100 between 2014-15 to 13,700 between 2015-16 is a significant drop off, although the amount of cash transferred did not fall as dramatically, dropping from £1.76bn to £1.5bn across the same periods.
Released yesterday, this is the first set of HMRC figures, see Summary Table below, since the pension freedoms were introduced in April 2015 and the requirement for UK FCA-regulated advice being enforced for any UK overseas transfers. This follows a reduction in the number of Australian ROPS due to the Pension Age Test that was also implemented in 2015.
Individuals, including those living outside the UK, must take financial advice from an Financial Conduct Authority regulated adviser for all transfers out of final salary or guaranteed annuity rates pension schemes for pots over £30,000 (US$39,631).
The UK’s Department for Work and Pensions is also currently consulting on whether to scrap the ‘advice safeguard’ for expats, allowing them to use locally-authorised financial advisers instead.
The Finance Bill
Further relevant changes are also afoot within The Finance Bill, issued on Monday, that confirmed the intention of the UK government to level out how income is taxed, and how money is taken (pension freedoms), from QROPSs to bring them into line with UK registered pension schemes.
As a result from 6 April 2017, 100% of the income received from a QROPS by an individual who is UK resident for tax purposes will be subject to UK income tax, thereby bringing it into line with the taxation of income from UK registered pension schemes. Currently, only 90% of such QROPS income is subject to UK income tax, meaning higher-rate payers are taxed at only 36pc, but this will become 40pc.
A new proposal, referred to in the ‘Foreign Pension Schemes policy paper’ issued on 5 December 2016, relates to allowing QROPSs to operate the same pension freedoms as UK registered pension schemes. Currently, some QROPSs are limited in the pension benefits they provide, as a minimum of 70% of the pension fund needs to provide an income for life.
The Policy Paper proposes that these schemes are no longer restricted by the 70% rule and will continue to qualify as a QROPS so long as the provider of those schemes is regulated or the scheme itself is regulated.
However, as Rachael Griffin, personal financial planning expert, Old Mutual Wealth points, despite greater consumer protection for QROPS being welcomed, the draft Finance Bill issued alongside the Policy Paper does not address the removal of the 70% rule.
Old Mutual Wealth believes that it is essential that the IHT exemptions afforded to QROPS is maintained. “We expect to see similar provisions on the removal of the 70% rule for IHT exemptions for QROPS, but these have not been issued yet,” said Griffin.
“The industry figures show a significant growth in the QROPS market since these schemes were introduced in 2006. That growth has started to level off, albeit with a short spike in 2014/15. This suggests that the market is maturing at around £1.5bn a year. The average size of a QROPS transfer is over £100,000, highlighting the importance of these cases from a UK tax revenue perspective.
“Equalling out the tax treatment of UK and foreign pension schemes has been much anticipated. There remain clear advantages to using QROPS for people who are at risk of reaching the lifetime allowance limit on their UK registered pension scheme, and looking to move permanently overseas. QROPS have become a mainstream pension solution for expat clients and we see this continuing.”