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HMRC’s overhaul of the QROPS Rules

The Background

In early 2015 Her Majesty’s Revenue and Customs (HMRC) announced an overhaul of the ‘Qualifying Recognised Pension Scheme’, or QROPS for short, rules, which would have implications for individuals wishing to transfer their UK pension benefits to an overseas pension arrangement.

The QROPS was introduced on 6 April 2006 as part of the ‘simplification’ of UK Pensions under the Finance Act 2004. A QROPS was an overseas pension scheme that met certain requirements set by HMRC which could receive transfers of UK pension benefits without incurring an unauthorised payment and scheme sanction charge.

QROPS were mainly used where individuals with UK pension assets emigrate to other jurisdictions, and they were meant to operate broadly in line with UK pension rules. The added benefit they had for expats was that any pension or death benefits could potentially be taxed at a lower rate than if they were paid in the UK, so long as the pensioner remained outside of the UK’s tax system. HMRC had maintained a document known as the QROPS list, naming all the schemes that had consented for their inclusion, confirmed their eligibility and submitted the relevant documentation to HMRC.

When a transfer to a QROPS was requested, one of the due diligence checks undertaken by pension scheme administrators was to check the scheme existed on the list as a ‘Qualifying’ scheme. This gave a large degree of protection for pension scheme trustees should the QROPS subsequently become a compliance issue.


Why did HMRC decide to change the QROPS requirements?

In light of the increased pension flexibilities introduced in April 2015, HMRC decided to review the conditions an overseas arrangement has to satisfy if it is to be a qualifying arrangement. From April 2015, retirement savers over age 55, can opt to withdraw cash from certain pension arrangements as and when they like. Where a pension arrangement does not allow savers to withdraw their pension benefits as cash, there is usually the option to the transfer their benefits to an arrangement which does.

UK pension savers can opt to take up to 25% (some are entitled to higher amounts if they have any protected tax-free cash) of their pension benefits as a tax-free lump sum (with the balance taxed at their marginal rate) and the minimum age at which they can take their pension benefits (in ordinary health) is age 55. However, in certain jurisdictions, savers can take a tax-free lump sum of up to 30% and the balance would then be taxed at the basic rate in the country where they are tax resident (which could be 0%). Some overseas arrangements also allow benefits to be taken earlier than age 55.

Furthermore, HMRC recently lost a legal case in 2013 where they had tried to reclaim tax from a previous QROPS arrangement as its members had, in their view, broken the ‘Qualifying’ rule. Part of the reason for their losing the case was the use of the word ‘Qualifying’ in the title of the list. The Courts felt that this was a reasonably strong endorsement of the arrangement.


What has changed?

From April 2015, HMRC has moved to a ‘Recognised Overseas Pension Scheme’ (ROPS) list in an attempt to put the responsibility on pension scheme trustees to verify that the arrangement is one which would be deemed ‘Qualifying’. In fact their website clearly states:

“HMRC can’t guarantee these are Recognised Overseas Pension Schemes (ROPS) or that any transfers to them will be free of UK tax. It is your responsibility to find out if you have to pay tax on any transfer of pension savings”.

Trustees now face a risk that a transfer to what is now a ROPS arrangement could, at some point, be deemed to not meet the ROPS requirement, either because they fail a part of the criteria at some point in the future. This potentially puts the transferring scheme at risk of a ‘scheme sanction charge’ as well as the scheme member at risk of an unbudgeted tax liability.

Due diligence on overseas scheme transfers is costly, difficult, time consuming and cannot be guaranteed to be complete. There have been mixed views from legal advisors on what pension scheme trustees should do and some have suspended all transfers to overseas pension arrangements pending advice from their lawyers, posing another unbudgeted expense.


How is Quantum helping their pension scheme trustee clients?

Quantum has thoroughly investigated this matter and taken legal advice in order to establish the necessary due diligence processes and warranties to satisfy HMRC’s conditions. On receipt of a request to transfer to an overseas pension arrangement, Quantum provides the necessary discharge forms, which individuals, their financial advisers, and their overseas receiving scheme must complete, in order to evidence that their chosen arrangement is ‘Qualifying’ for HMRC’s purposes.

We then instigate our usual procedures that we apply to any transfer request in order to ensure that the receiving policy and financial adviser are legitimate so that we can eliminate, as far as possible, the pensions scams that are becoming more prevalent these days.

Only when we have undertaken our due diligence and have received all of the required forms do we organise payment to the new arrangement.

If you would like to know more about this or how we can assist you, please let us know.


Sally Wilton