A 25 per cent charge on Qrops introduced in Chancellor Philip Hammond’s first and last Spring Budget aims to deter individuals looking to avoid tax by moving their pension savings to a different country.
The charge on Qrops will apply unless both the individual and the Qrops are in the same country after the transfer, or the Qrops is in one country in the European Economic Area (EEA) and the individual is resident in another EEA after the transfer.
Fees on the transfer will also be waved if the Qrops is an occupational pension scheme set up by the individual’s employer, or if the Qrops is an overseas public service pension scheme and the individual is employed by one of the employer’s participating in the scheme.
If the Qrops is part of a pension scheme established by an international organisation to provide benefits in respect of past service and the individual is employed by that international organisation, then it can also avoid the charge.
The government expects this charge to raise around £65m in 2017 to 2018, and an additional £120 from 2018 to 2020.
Ian Neale, director at Aries Insight, said that the charge will have a huge impact to prevent those looking to transfer their pension savings overseas.
“A 25 per cent charge is obviously punitive. It’s a very serious deterrent, coupled with the constraints on overseas constraints generally,” Mr Neale said.
“The attraction of doing so is severely curtailed by this charge.”
Mr Neale added that £1m transfers in Qrops are not unusual, so if someone undergoing the transfer was set to lose £250,000 then “straight off is a huge hit”.
Andrew Tully, pensions technical director at Retirement Advantage said that the charge appears to signal a “significant shutting down” of the Qrops market.
“The government has been increasingly concerned about the use of these schemes for the past few years and this appears a major move to reduce their use,” Mr Tully said.
Adding a 25 per cent charge on Qrops will both generate extra money for the government as well as help to prevent future pension scams, according to Paul Darlow, head of proposition development at Xafinity.
“Those individuals who have instructed transfers to a QROPS but where the transfer has not yet been enacted may wish to think again – and their pension scheme should probably double check their awareness of this new tax before proceeding with any instruction,” Mr Darlow said.
The government has put extra focus on prevention of pension scams now that retirees can use the pension freedoms to take their savings as a lump sum.
The charge was welcomed by Martin Tilley, director of technical services at Dentons Pension Management, who said that it will help “prevent the inappropriate promotion of Qrops for measures other than for which they were intended”, such as attempts to avoid tax due under the drawing of benefits from registered schemes.
“The widening of benefit options and reduction in taxation of death, both pre and post age 75, had already made the transfer of pension savings to QROPS less attractive and these measures should thwart all but the genuine cases of change of domicile.”
Some may be able to avoid the charge, as the Budget paper also added that “exceptions will apply to the charge allowing transfers to be made tax-free where people have a genuine need to transfer their pension, including when the individual and the pension are both located within the European Economic Area”.
