Firms which provide overseas pension schemes have predicted that a government consultation will reduce tax charges for withdrawals in line with changes to the wider taxation of pensions, after HMRC revealed it is likely rules will be read across.
London and Colonial have predicted that the tax rate for withdrawals from uncrystallised and crystallised funds in qualified recognised overseas pension schemes are set to come into line with UK pension schemes, ensuring a level playing field between products.
This follows the news that HM Revenue and Customs is consulting over Qrops’ tax status.
Commenting on the government’s Freedom and Choice in Pensions consultation, which closed in July, HMRC stated that the changes to pensions rules which will be brought into force in April 2015 should be extended to Qrops schemes.
Currently withdrawals from Qrops which go above the lump sum rate in the UK are taxed in the same way as unauthorised payments, which means a standard rate of 40 per cent plus as 15 per cent surcharge is applied.
The government is consultating on broader tax changes, which is expected to eventually see charges for uncrystallised funds on death in UK schemes reduced from the current 55 per cent level, and is due to report back at the Autumn Statement in December.
Adam Wrench, London and Colonial’s head of product and business development, predicted that the 55 per cent tax rate for uncrystallised funds where the member is aged over 75 will be abolished, and the rate applying to crystallised funds will be reduced from 55 per cent to 40 per cent to bring it into line with inheritance tax.
Mr Wrench said: “The only clues we have so far on this is a reference made in the Treasury response paper issued in July.
“The Treasury acknowledged that the industry considered the 55 per cent to be too high and also recognised that the tax charge on uncrystallised funds where the member was aged over 75 ‘may be too high when the new freedoms come into force’.”
According to the Qrops provider, this will boost the popularity of such overseas schemes and will dissipate fears that the Budget pension reforms would bring an end to Qrops, following concerns the flexibilities would not be replicated across to overseas schemes.
Darren Taylor, a member of the technical team at Qrops trustee and administrator Brooklands Pensions, told FTAdviser that until the government clarifies or confirms these issues, he is working to the current state of affairs.
“We’re in an ‘interim period’ according to the FCA, so I suppose we’ll just have to wait and see, but I’d agree that the 55 per cent rate is too high.
“Sipps [self invested personal pensions] may be more popular amongst advisers in the short term due to the Budget changes, but its not really about Sipps versus Qrops, both have their place and advisers should make sure clients get the right product at for their individual circumstances.”
A Treasury flexibility workshop in August, run by the Investment and Life Assurance Group, stated it was considering how Qrops legislation could be updated to enable payments similar to flexi-account drawdown and uncrystallised lump sums to be made.
In a statement to FTAdviser, HMRC said: “The government recognises that the changes to the pensions tax rules as a result of flexibility will have implications for the rules relating to Qrops.
“The government is considering these implications further to ensure that the rules relating to Qrops are appropriate when the new system comes into force”
Mr Wrench added: “This confirmation by HMRC will be a boost to those firms that were perhaps concerned with the previous scaremongering headlines and will be welcome news that the additional flexibility in retirement announced to UK schemes looks set to be extended to Qrops including the ‘cashing-out’ option.”
