In the UK, the tax man, HM Revenue and Customs, has removed thousands of Qualifying Recognised Overseas Pension Scheme (QROPS) from its approved list. Globally, the number of schemes has fallen from around 3,800 to 663.
British expats are seeing their options for pension scheme investments diminish.
In Switzerland they are down from 100 to just one, in Spain they are down from 16 to two and in South Africa they have been cut to seven from 29. Canada is expected to see a cull in the coming months.
A QROPS is generally regarded as an attractive option for expats who want to retire offshore and are worried about the effect of currency swings on their payments. They offer tax advantages when drawing pension benefits and can be tax free upon death. Transferring a UK pension into a scheme such as this can reduce taxation and avoid UK taxation as long as the pensioner remains tax resident outside of the UK.
But they are being affected by pension changes in the UK. Earlier this year HMRC wrote to overseas schemes that accept UK transfers warning that they must fall in line with minimum UK pension requirements in order to maintain their recognised status, and apply to benefit from the new UK pension freedom rules.
Under the new rules, which allow savers to take pension income without limits, pension schemes must prohibit members from accessing their savings before the age of 55, unless the member is retiring early due to ill health; however, many overseas schemes previously allowed under 55s to take some of their funds early, which is not in line with UK rules.
Some QROPS jurisdictions allowed early payment of benefits before the age of 55 and therefore, these funds do not meet all the strict requirements needed to be recognised by HMRC.
with the sole aim of the pension holder then being able to withdraw a large proportion of the cash as a lump sum. This is not how QROPS were ever intended to be used. They are meant to provide an income in retirement for those living outside the UK, so most QROPS are still subject to capped income drawdown, but this is currently under review for those schemes willing to adopt other UK pension restrictions.
Ultimately, it means that clients are even more protected, making QROPS, with all their enormous financial benefits for expat retirees, an even more attractive option. It is likely that other jurisdictions will benefit from HMRC’s new list, including Malta, the Isle of Man and Gibraltar, which have amendments that meet the UK rules. Their lack of ability to offer flexi-access drawdown and the increase in their minimum pension age has actually made them less appealing until/unless they are granted the new rules, which is still under review and no trustees have yet adopted.