QROPS “clampdown” or media hype? Bethell Codrington looks at the facts behind the headlines
Over the last week or two there has been a growing media frenzy over what HMRC are doing with the QROPS/ROPS list, culminating with the ‘temporary suspension’ of the list on 17 June.
Let’s take a step back, and - at the risk of repeating myself- ask what has actually happened?
In March 2015, HMRC issued a draft Statutory Instrument governing what rules and regulations an overseas pension scheme needed to comply with to remain a QROPS/ROPS, and the one that has jumped to the fore is minimum pension age.
As required by 2015 SI 2015/673 (Amendments Regulations), an overseas pension scheme must satisfy the 'pension age test' in order to be a recognised overseas pension scheme. The fund must satisfy regulation 3(6A) of the Requirements Regulations. That regulation provides:
(6A) The benefits payable to the member under the scheme, to the extent that they consist of the relevant transfer fund, payable no earlier than they would be if pension rule 1 in section 165 [of the Finance Act 2004] applied.
Pension rule 1 in section 165 of the Finance Act 2004 provides:
No payment of pension may be made before the day on which the member reaches normal minimum pension age, unless the ill health condition was met immediately before the member became entitled to a pension under the pension scheme.
'Normal minimum pension age' is defined in section 279(1) of the Finance Act 2004 to mean (in respect of retirements on or after 6 April 2010) age 55.
A question of compliance
Why all the fuss? Well, it would appear that when they applied for a QROPS reference number not all pension funds/schemes remembered their undertaking to HMRC that they were obliged to keep abreast of current regulations and if unable to do so, inform HMRC and apply to be de-listed.
Some jurisdictions complied already, and others changed their laws/rules to be compliant by 5 April 2015. There were however, two notable exceptions, those being Ireland and Australia, who between them occupy many pages of the old ROPS list on HMRC’s website. It would also appear that there may be a major issue with Canadian Retirement Savings Plans (RSPs) which has yet to be picked up by the mainstream trade press.
In April, HMRC sent what has been described as a “courtesy letter” together with a questionnaire asking all schemes whether they still complied. It was not until late May that the world woke up to the problem, and that two of the main jurisdictions for QROPS, in the strict sense of the legislation, did not comply.
A large number of schemes had already returned their questionnaires to HMRC signing off that they were compliant, having made what they thought were suitable retrospective amendments to their Trust Deed & Rules. Unfortunately there was a further problem lurking.
On 16 June the Superannuation Committee of the Law Council of Australia Legal Practice Section wrote to HMRC (totally six pages and an attachment), in which they acknowledge that - and I quote:
“Australian law is broadly consistent with the ‘pension age test’. However, there are limited circumstances where a member's benefit may be cashed on an earlier date. This means that, applied strictly, an Australian regulated superannuation fund will not satisfy the pension age test because of the law of the country in which the [fund] is established.”
It then goes on to ask HMRC for their views and an exemption.
It is the writer’s humble opinion that HMRC cannot and will not respond in any detail to the letter. The reason behind this is quite simple. Since 2006, all Pension Funds have operated on a ‘self-assessment basis’ – that is, a pension scheme applies for an HMRC reference number by submitting an application stating that they confirm with the necessary regulations.
If you check the HMRC website regarding ROPS – though it is currently suspended – it stated on 9 June that: “This list contains some of the overseas entities that have told HM Revenue and Customs (HMRC) they are Recognised Overseas Pension Scheme (ROPS) under section 169(2) Finance Act 2004. HMRC can’t guarantee these are ROPS or that any transfers to them will be free of UK tax.”
If HMRC were to respond to the Australian letter, they would ‘de facto’ be giving “approval”, which they could not do to a single jurisdiction without an outcry from all others wanting to be treated in a similar vein. It would also signal a return to the pre-2006 regime of “approval”, something HMRC is not geared up for in the short term at least.
So where does this leave QROPS transfers going forward?
My understanding is that HMRC’s hands are tied by the UK domestic legislation, and that any pension transfer that was made to an Australian pension scheme between 5 April 2015 and the date the ‘list’ was suspended on 18 June will be deemed “unauthorised” and an “unauthorised payment charge and surcharge” totalling 55% will be issued. The same is likely true for Ireland.
The question that has not been raised is: will HMRC also go after the ceding schemes for a Scheme Sanction Charge of 15%?
For schemes that were compliant on 5 April 2015 there will be little change apart from an amended list and disclosure from HMRC.
A number of UK providers have decided unilaterally to suspend current transfers until the HMRC list is re-published, which is an interesting decision, as the list itself does not provide any comfort. What needs to happen - and should already be happening - is that ceding schemes should be asking appropriate questions of providers offering QROPS/ROPS, and those product providers should be able to satisfy the ceding schemes of their compliance with the regulations.
Those of us fortunate to be in well-regulated, legislatively-compliant and tax-compliant jurisdictions should weather this storm. There is no substitute for specialist knowledge in what is a complex field.
Read more about TMF Group's QROPS offering, regulated through Malta, or contact the international pensions team.