Qrops... Confusion reigns!

The government’s response to the Freedom and Choice in Pensions consultation document stated: “The government will [...] ensure that the rules relating to Qrops are appropriate when the new system comes into force.”

Meanwhile, the Pension Schemes Newsletter 66 issued last December by HM Revenue and Customs, stated: “The conditions a scheme has to satisfy if it is to be a Qrops are under consideration [...] Any changes are due to take effect from 6 April 2015.”

It was generally accepted this would mean abolition of the 70 per cent rule. This means, for overseas schemes outside of the European Economic Area, 70 per cent of UK tax relieved funds must be designated to provide the member with an income for life at age 55 or later.

The legislation introducing this rule was SI 2006 number 206 - sometimes called the “Rops regulations”. It was these regulations that needed to be amended. A draft statutory instrument to do that was published in mid-December 2014 and proposed that the 70 per cent rule be abolished.

In its place was suggested an extra regulatory restriction for non-EEA schemes. These draft regulations also proposed the mandatory application of the 55 year-old minimum benefit age for all overseas schemes.

Silence reigned until just before the Budget speech in March. Then the bombshell landed. When the redrafted regulations were laid before parliament in the form of SI 2015 number 673, astonishingly the 70 per cent rule was retained and the new mandatory across-the-board age 55 rule was put in place.

The explanatory memorandum relating to SI 2015/673 said “the 70 per cent rule remains in place temporarily”. Not a squeak has been heard since. So we know that the 70 per cent rule is going to be replaced, but we do not know what with or when by.

Meanwhile, the universal application of the age 55 rule (except on the grounds of ill health) is causing confusion and uncertainty.

This is because local legislation in some jurisdictions allows access before age 55. So for example there are sub-age 55 members of Maltese Qrops already receiving pensions. A literal reading of SI 2015/673 means that such schemes, if continuing to pay benefits before age 55, should no longer be Qrops.

Yet we know that HMRC have told schemes in this position that benefits already in payment for the under 55s may continue. This breach of the legislation is surely a recognition that the amending regulations included unintended consequences that will be remedied.

It also looks inevitable that schemes in Australia and Ireland will be taken off the Rops list. New Zealand-based Kiwi savers have already been removed. This is because in some circumstances they can provide benefits before age 55. Australia and Ireland are the two largest jurisdictions with schemes on the HMRC list.

The real worry is that while this uncertainty continues, those unaware of the situation could be transferring to schemes which do not satisfy the new conditions. As many advisers will know, this risks the imposition of substantial unauthorised payment charges.

It is now imperative that action is taken quickly by the UK government to remedy the situation by amending the regulations. It seems hugely unfair that, having promised to extend the pension freedoms to those who have opted to transfer their pensions overseas, that this is now being withheld.

James McLeod is head of pensions at AES International