QROPS – will closing the loopholes close the market in the UK?
Tax evasion, fraud and mis-selling – all of these have been linked to Qualifying Regulated Overseas Pension Schemes (QROPS) – so no wonder recent years have seen intense regulatory scrutiny and censure. The question is, when dealing with overseas jurisdictions, can the rules ever be watertight?
Last April (2012), HMRC delisted hundreds of schemes from its register, including 309 from Guernsey. HMRC stated: “QROPS is intended to be the equivalent of a UK-registered pension scheme. It was never intended that those transferring their UK pension savings should gain tax advantages not available in the UK.”
The number of schemes available in Jersey has fallen from 138 to 64, a fall of 54 per cent, while the number of Isle of Man registered QROPS fell from 185 to 173 between March and April, while the number of schemes registered in New Zealand fell from 64 to 23, a fall of 64 per cent. In August 2012, Cyprus fell foul of the rules with all its schemes delisted.
All this followed on from action in 2008, when HMRC deregistered all Singapore-based QROPS. In 2010, it revoked the status of Hong Kong-based Beazley Consulting Pension Scheme as it failed to meet its criteria for QROPS status.
Cracking down on avoidance
Those who had funds within a now delisted QROPS need guidance – further transfers from UK pensions are not allowed due to such a transfer being regarded as an unauthorised payment and would attract a charge of 55 per cent.
HMRC’s rules are to block people from exploiting double taxation treaties to escape paying UK tax on their pensions. It states providers must treat non-residents and residents of a jurisdiction in the same way for tax purposes. Or in the case of New Zealand, this was considered to be breaking rules by allowing people to cash out their entire pension – QROPS rules insist schemes should retain 70 per cent of transferred funds for retirement income.
QROPS are now subject to a new test to see if they meet the requirements along with new reporting requirements. There are new reporting timescales for transfers of 60 days for UK schemes and 90 days for QROPS. A new provision was introduced for QROPS to report payments made for 10 years – previously five years – from the date of transfer, this is in addition to the current requirement to report a payment made when the member may be subject to tax charges.
Scheme managers must report to HMRC any payments made out of transfers of pension savings they have accepted from UK pension schemes, even when that scheme has ceased to be a QROPS since accepting the transfer.
These new reporting requirements reflect HMRC’s determination to ensure that the overseas schemes are used to provide pensions for people in retirement rather than, as some providers are said to have attempted to use them for, as a means of avoiding tax on a sum that, after five years, could be extracted from the pension structure in the form of cash.
“HMRC seem to be extending the onus on non-UK pension schemes that are QROPS to report and keep records in line with comparable UK pension schemes,” said John Batty, head of pensions at Momentum, an international QROPS provider.
Those using QROPS are mostly only allowed to take out what they would do if they remained in the UK – that is 25 per cent of the pot upon retirement. However, some QROPS schemes still allow the investor to take up to 30 per cent. HMRC rules say that 70 per cent of the pension pot must be ring-fenced to provide an income in retirement.
Fraud risks revealed
Meanwhile, Jane de Lozey, senior lawyer for the Serious Fraud Office has highlighted the risks involved in transferring pensions into QROPS run by unregulated providers.
In the UK, the Serious Fraud Office (SFO) and Financial Services Authority (FSA) have warned that self-invested pension plan investors are reporting a rising number of frauds involving unregulated renewable energy investments.
She explained that fraudsters set up plausible renewable energy investments, often involving biofuel or rainforest projects. Money is transferred from a SiPP in to the investment fund and then transferred on again offshore by the fraudsters.
“The investments are highly speculative at best and fraudulent at worst,” she said. “Many of these criminals have worked in the industry and know the terminology and reassurances investors look for.”
She added: “Disruption is one of our key objectives as there is so much fraud out there. One key area for controls is at the point of transfer. There is a need to have checks that (the receiving scheme) is an occupational scheme, but people are very good at setting up what looks like a bona fide occupational scheme. We would really like the providers to act as gatekeepers.
“The investments are highly speculative at best and fraudulent at worst. Many of these criminals have worked in the industry and know the terminology and reassurances investors look for.”
Meanwhile, the FSA teamed up with HMRC last year to warn against firms that were offering to unlock or transfer cash tax-free – including through QROPS.
A joint statement said: “There is a high chance that these are scams trying to con you out of your money. The contact usually comes out of the blue, with most firms cold-calling or promoting via websites.”
It added that one of the most common ploys was for scammers to recommend transferring an existing personal pension plan to a QROPS to avoid paying UK tax. It was said the risks that deals could be a “complete scam and you will lose your entire pension and, in addition to that loss, you will have to pay tax, penalties and charges to the HMRC”.
Even if the scheme was genuine, it said that that there could still be high fees charged, meaning only 70 percent to 80 percent of a pension would remain once the firm has taken its fees.
Back in 2011, HMRC set up a specialist fraud unit to monitor QROPS due to concerns about fraudulent activity and irresponsible transfers. The unit is a sub-division of the Anti-Fraud Unit and is within its pension scheme services department, works closely with officials at the Pensions Regulator and the FSA.
Further, few QROPS providers regulate investments within their funds and often ask clients to certify that their transfer has been recommended by an independent financial adviser.
Once expats have a QROPS pension, some schemes allow them to opt to self-manage their funds – and this is where the fraud issue can arise as they do not have the resources to check if a fund is bona fide.
Confidence in the QROPS sector has been severely dented – and considering the schemes were only launched in 2006, this has happened rapidly.
What is more, expats living in the Middle East now have less choice after the Qatar Financial Centre (QFC) pulled out of the market in July.
Regulator QFC decided the offshore pensions market is too uncertain, given the HMRC clampdown. A spokesman said: “Our sense was that the HMRC changes introduced last December, which saw hundreds of schemes in certain jurisdictions delisted, introduced uncertainty about how the QROPS market in some financial centres may develop over the next couple of years.”
Jersey has also announced it will back away from the QROPS market but, it seems that the focus is now primarily on Malta and Gibraltar.
The rise of Malta and Gibraltar
John Storrie, financial planner at Guardian Wealth Management commented: “Malta has quite an extensive double taxation (DTA) list which is why it’s been an EU member since 2004. And that’s why a lot of the business is going into Malta.”
Malta has launched a high profile media campaign aimed at disassociating the island’s pension industry from other QROPS centres.
The message is clear – if a retirement saver has a Malta QROPS, then they must file a tax return – if the country where the QROPS investor lives has a tax treaty with Malta, then tax credits are available, if not, QROPS payments will be taxed in Malta. The country has 55 double taxation and information swapping treaties with other countries.
Meanwhile, Gibraltar has effectively drafted and passed new legislation. In the past, the country did not tax pension income, but changes made to their pension laws have changed that.
Gibraltar’s QROPS providers have announced a new code of conduct intended to provide a framework of best practice to guide the provision of these offshore pension products. Adherence to the code is mandatory for all Gibraltar QROP scheme providers and will be enforced by the Gibraltar Association of Pension Fund Administrators (GAPFA).
QROPS allows the transfer of UK pension savings to one overseas for expats and those retiring abroad, and any tax relief (including tax exemptions) applying to the pension benefits must be the same (or substantially the same) for local and overseas members of the scheme.
Can the market continue?
Benefits are that investors have control over their money and do not have to purchase an annuity. They can also withdraw a lump sum tax free, depending on the jurisdiction.
But, the QROPS market has clearly appealed to those looking to avoid tax in the past and also appeals to fraudsters because it is aimed at high net investors.
Some have questioned whether the market can continue – but Malta and Gibraltar are keen to show they can pick up the mantle where others have failed and may be joined by others – and Guernsey is said to be making a play to re-enter the market.
Mark Biddlecombe, client services director of fiduciary services provider Nerine Trust, added: “I think it’s clear that allegations of mis-selling in the past have made HMRC more suspicious of QROPS than, perhaps, it is of other financial-services products. There were also some providers in the marketplace offering ‘QROPS light’ products, either at a very low cost or with no visible fee at all. However, as we all know, you never get something for nothing in this life, and the customer will inevitably pay through commission, reduced fiduciary oversight and/or restricted investment choice. I don’t think that these developments – and the high profile they received in the press – helped matters.”
And, speaking of HMRC’s actions, Nigel Green, ceo of the deVere Group said: “I for one welcome the changes. QROPS for people who have left the UK have many benefits. It’s important they are used correctly and not abused by a few.”
Essentially, the market can now be seen to have settled down and HMRC in particular has shown it is not to be trifled with. That is not to say that there will not be further attempts to manipulate rules. But, reputable advisers are taking the line that the clean up has been positive – and is providing greater trust and confidence in the approved schemes that remain available.
Caught out by QROPS
Back in 2011, a QROPS fraudster was jailed, after illegally releasing almost £3.5 million of pension assets to accounts set up in Barbados and Cyprus. Colin Person was found guilty of fraud at Hull Crown Court.
He was found to be using the defrauded funds to maintain a luxurious lifestyle. The case marked the first time that anyone has been found guilty of fraud in relation to QROPS pensions since their inception in 2006.
Pearson was sentenced to three years in jail after pleading guilty of making a false statement prejudicial to the HMRC.
Over the past three years he made over £225,000 in commissions while his clients were able to make withdrawals from their pensions without paying the usual tax rates.
Pearson and QROPS providers in Hong Kong set up their schemes as a way to enable clients to have immediate access to their full pension funds, which is strictly prohibited under QROPS regulations.
In 2006 Pearson set up a Barbados based pension trust, which despite him not having a FSA registration was approved. He then again managed to set up a firm based in Cyprus in 2008 that he fooled the HMRC into believing was genuine.
David Retikin, Director of Operations at Pryce Warner International, a financial services provider for expats, commented: “Credit must go to the HMRC for prosecuting fraudsters and continuously striving to close loopholes that some may try to exploit. The actions of some have the potential to tarnish the image of a pension fund that is used by many people around the world to ensure that they maintain a secure income when retiring overseas. This case also highlights the importance of setting up QROPS in jurisdictions that have proper regulatory mechanisms.”
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Rachel Gordon is a freelance journalist and copywriter. She started her career working for Property Week. She was later editor of Insurance Age for nine years, during which time she also launched Health Insurance, before turning freelance in 2000. She currently writes for business and financial titles and contributes to Wolters Kluwer Financial Services’ Compliance Resource Network. She has edited the quarterly magazine for the British Insurance Brokers’ Association (BIBA) since 2003 and acted as features/supplements editor for Post Magazine on an interim basis.