A taxing question of Rops and pension freedoms

Over the past nine years, qualifying recognised overseas pension schemes (Qrops, now known as ‘Rops’) have been the centre of regulatory and tax attention.

Several jurisdictions took a lax approach to Rops rules, allowing funds being taken out contrary to the rules and enabling some unauthorised operators to put people into unsuitable schemes. As Marilyn McKeever, associate director, private client, for Berwin Leighton Paisner explains, “Certain companies and jurisdictions used Rops as a way for members to extract the whole fo their pension funds without paying the UK tax due.”

This forced HM Revenue & Customs to crack down on such jurisdictions, affecting both the legitimate operators as well as the illegitimate ones, and causing providers and advisers to rewrite their rule books on what is, and what is not, permitted any longer, and where.

Some of the tightening itself caused investor detriment, leading to legal challenges, with previously qualifying schemes suddenly being made non-qualifying. In 2013, one group action by Qrops investors in 2013 saw HMRC admit a humiliating defeat in a High Court challenge after investors in a Singaporean scheme were put at risk of a tax-take because of HMRC changes.

In 2008, HMRC purged 200 schemes in Singapore, 300 in Germany in 2012 and suspended its whole Rops list on 17 June 2015 until its reissue on 1 July. Before 17 June, there had been 1653 Australian Rops and 787 Irish Rops on HMRC’s list. After the cull, this dropped to just one qualifying Australian scheme and 56 qualifying Australian schemes. In total, 3037 global Qrops schemes were dropped in 2015.

“The effect of the regulatory forcus on Qrops/Rops has restricted the availability of international pension products as a whole”, Jason Porter, director of Blevins Franks says. “HMRC has consistently reappraised the rules of what constitutes Rops, and which schemes across the jurisdictions meet the criteria.”

Pension freedom and choice

But while the world of Rops was undergoing change across the globe, the UK itself was changing its pension system, enabling people aged 55 and above complete access to their pensions.

To make sure people were not at risk of being targeted, however, the UK government and regulators issued strict rules to prevent inappropriate or fraudulent advice being given.

In June 2015 the Financial Conduct Authority published its ‘Proposed Changes to our Pension Transfer Rules: Feedback on CP15/7 and final rules’. In this - among other things - the regulator dictated that any transfer out of a safeguarded rights scheme must have independent financial advice, from an adviser with a suitable pension transfer qualification, where the value of that scheme was £30,000 or higher. @Image-603a71c9-dfa8-4595-99e8-23343e9473cf@

As a result, Mr Porter believes it has been more difficult for firms not regulated in the UK to help expats since the pension freedoms kicked in.

He says: “The ability to take lump sums from one’s pension fund raised the fear of mis-advice, and therefore the government and the FCA have tightened the rules around the advice requirements for pension policy holders, especially with regards to defined benefit schemes.

In January 2016, research by Old Mutual International among 289 cross-jurisdictional advisers revealed 38 per cent wanted a review of pension transfer rules.

The concern was raised in connection with DB pension transfers, as 69 per cent of the international intermediaries surveyed said they have had to link up with a UK IFA to do pension transfers under the FCA’s rules.

In a worst-case scenario, this could mean five different firms or advisers involved in providing advice on a pension scheme which may only be worth just in excess of £30,000 Jason Porter

In the past, an individual may have simply employed the services of a non-specialist offshore advisory firm; now, more expertise is required. The individual will also need a UK pension transfer specialist, and may additionally need a Rops specialist.

But the call for experts does not end there. Mr Porter adds: “Our overseas resident may have to pull in the expertise of a local pension expert, and a local personal tax adviser, from the jursidiction in which he is living or to which he is moving.

“In a worst-case scenario, this could mean five different firms or advisers involved in providing advice on a pension scheme which may only be worth just in excess of £30,000.”

However, many international intermediaries had found there were questions of liability and clients would be faced with two charges, one for their primary adviser’s service and one for the UK advice.

Further issues are around flexibility. Many Rops will have to amend their terms to allow for flexible withdrawals - but not all Rops have been set up to do this.

And then there is the usual administration. Ms McKeever adds: “Where the Rops is employer funded, a transfer to it will not convert UK pension income into non-UK income, so there will still be UK tax due.

“Where the Rops holds funds paid in solely by the member, there can be other tax issues if the member remains UK resident, although if the member ceases to be UK resident the pension income becomes foreign-sourced and not subject to UK tax.” However, it may still be subject to tax in the country of residence.