QROPS: new HMRC rules to eliminate overseas pension scams

HMRC has outlined new rules to improve protection for pensions transferred out of the UK in QROPS.

HM Revenue & Customs (HMRC) has published draft rules designed to improve protection for Brits who transfer their pensions to overseas schemes. The good news is that this new legislation should reduce the levels of fraud and abuse associated with 'pension-busting'.

QROPS: overseas pensions

The taxman wants to tighten up the rules surrounding Qualifying Recognised Overseas Pension Schemes, known as QROPS. QROPS have been around since April 2006, when a whole raft of new rules governing pensions came into force on 'Pensions A-Day'.

A QROPS is an overseas pension scheme which meets certain criteria set out by HMRC. Once approved by the taxman, a QROPS can receive a transfer of UK pension benefits without being hit by the steep fines and sanctions, which are imposed on unauthorised transfers.

Generally, QROPS are used by British subjects leaving the UK to permanently emigrate or retire abroad. They are also used by foreign citizens who have built up UK pension benefits and wish to repatriate these to their home countries.

What's more, by transferring benefits to a QROPS, expats and emigrants can avoid steep UK taxes on withdrawals and death benefits.

QROPS restrictions

The current rules impose a number of restrictions on QROPS, in order to protect UK pension benefits from being misused or misappropriated overseas. These restrictions on include:

1. Being established in the European Union, Iceland, Liechtenstein or Norway.
2. Being established in a state with which the UK has a wide-ranging 'Double Taxation Agreement'.
3. At least 70% of the funds transferred must be used to provide the member with an income until death.
4. Pension benefits will not be paid to members earlier than they would under the rules of the UK scheme.

HMRC produces a list of QROPS that meet its conditions and have asked to be included on the list. This is updated on the 1st and 15th of each month.

Until 2012, tax havens Guernsey and Cyprus were the most popular jurisdictions for establishing QROPS, but rules introduced a year ago forced many schemes to delist. Since then Malta, the Isle of Man and Gibraltar have become popular locations for QROPS listings.

A new regime

Not all transfers of UK pension benefits abroad go smoothly. In some case, members have lost some or even all of their funds through steep charges or blatant fraud. Where fraudulent activity is suspected, HMRC will remove QROPS from its approved list as soon as possible. Even so, millions of pounds have been lost through dodgy 'pension-busting'.

To refine the QROPS regime and improve consumer protection, HMRC has proposed a set of new rules. These include:

• Requiring overseas schemes to report payments out of funds transferred from UK pension schemes, even if they are no longer QROPS (and allowing scheme managers to report data electronically).
• A penalties regime for non-compliant former QROPS.
• A system for scheme managers to re-notify HMRC that they meet the conditions to be QROPS.
• A relaxation of the 'benefits tax-relief test' for overseas public-service schemes and pension schemes of international organisations.

By improving the reporting requirements for current and former QROPS, as well as imposing fines on offending scheme managers, HMRC hopes to cut down on pension-busting and other dodgy dealings. QROPS managers and other interested parties have until 21st June to comment on these proposals, before they are drafted into legislation for approval in Parliament.

Is a QROPS for you?

If you live and work in the UK now and contribute (or have contributed) to a UK pension, but plan to retire overseas in the future, then you should certainly look into QROPS.

By transferring your UK pensions into a QROPS, you gain greater control over the investment strategy, flexibility and future financial security of your pension pots. What's more, with careful tax planning, QROPS may allow you to make considerable tax savings, avoid buying an annuity, and leave your pension pot to your beneficiaries.

Then again, transferring UK pension benefits to a QROPS is not something you should do lightly. Indeed, you should always use a specialist, FSA-qualified UK adviser to undertake this process.

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