This article was originally published in Pensions Insight, July 2010
Adrian Howe, Pensions Director at Marlborough Pension Trustees, explains all when it comes to QROPS, QNUPS and EFRBS
Since A-Day in 2006, the UK has been going through massive changes as successive Governments have looked at savings and pensions for people in the future. The problem is that people in the UK are particularly poor savers, and the Government has been failing to incentivise people to put money into pensions, cutting tax relief and putting a limit on contributions. As a result, many in the UK are looking at offshore contracts from an employer's point of view and an individual's point of view because there is no choice in the UK. With limits on annual contributions and a lifetime cap of £1.8m, it is restrictive for high earners. The offshore pension arrangement we are involved with are becoming more important to those in the UK and to those leaving the UK for offshore islands such as Jersey, Guernsey and the Isle of Man. With capital gains tax and income tax rises on the cards, more and more people are asking themselves whether they want to be in the UK. High net worth individuals in particular are questioning whether they need to live in the UK in order to run their businesses in the UK, given transport links and the ease of moving to places such as the Channel Islands.
All about QROPS
It was the A-day legislation in 2006 which really allowed Qualified Registered Overseas Pension Schemes (QROPS) to take off. These rules outline how an individual in the UK who is planning to leave or who has already left can transfer their UK registered pensions out to an alternative offshore arrangement. A QROPS is an offshore pension which is registered in a jurisdiction qualified by HMRC and approved by the jurisdiction where the trustee is resident, although not necessarily where the individual is resident. What happens is that when a member applies to a particular scheme the trustees in the offshore plan have to apply to the onshore trustees for the transfer of the member's pension. The UK trustee will confirm with HMRC to see if it is an approved scheme. Approved means it is qualified in the UK for a transfer of registered pension, and must abide by certain rules to allow the transfer. There is no tax charge for the transfer to an authorised pension scheme. Following the transfer to the new scheme, the trustees have to abide by a five year reporting requirement from the date the individual leaves the UK. During that time the scheme trustees have to abide by UK pension rules such as retirement age and drawdown.
After the five years is up, the requirement to report back to HMRC on any transfers or payments to members during that year expires, and the plan falls into the jurisdictional rules of the offshore pension scheme. If your QROPS is registered in a non-EU country such as Guernsey, Jersey, the Isle of Man, or even in EU countries such as Malta which have relaxed pension rules, you will now have far greater flexibility in investment choice and in drawing benefits. And if you are resident outside of the UK in one of these zero tax jurisdictions, you will pay no income tax. You will get no tax relief for any additional contributions paid in, but you potentially pay no tax on the way out. So the QROPS structure is for transferring existing pensions, not for plans to which you are still contributing. And individuals who are looking to transfer into a QROPS need to take very good advice to ensure the structure is tax efficient in their country of residence.
QNUP is the new QROP
A related pension plan is the Qualifying Non-UK Pension Scheme (QNUP): a recent development made possible by new HMRC legislation (statutory instrument 51/ 2010.) A QNUP has the benefits of a QROP, but is in addition exempt from UK inheritance tax. Inheritance tax is relevant for anyone domiciled in the UK (whether they are resident in the UK or not) and immunity from this tax is a considerable benefit.
Another great benefit of a QNUP is that a UK resident can contribute to a QNUP from taxed income to increase their pension funds. You might consider doing this if you were a UK resident who has maximised their registered pension allowance and still wanted to make contributions; or if you are earning over £150,000 a year and consider the new anti-forestalling restrictions on tax relief so onerous that the benefits offered by a QNUP outweigh the slim tax relief back at home.
Employer Financed Retirement Benefit Schemes (EFRBS) are a completely different pension structure which can be advantageous for high earning UK residents. EFRBS were devised to incentivise senior executives and staff members, shareholders and directors. They allow a corporate to make a contribution to an EFRBS from untaxed income to provide pension benefits to members at a later date. The employer makes the contribution gross of National Insurance (although it is recommended not gross of corporation tax). There is no income tax liability as only the employer makes a contribution.
The benefit is that the money is in a pension scheme for the member with gross roll up until retirement, greater flexibility, no capital gains or inheritance tax and you can retire from the age of 55. At retirement, depending on your country of residency, you will pay income tax as usual at your personal rate. The one issue you need to be aware of is that in the UK some promoters offer EFRBS with corporate tax breaks and loan backs to members worth up to 80% of contributions; this is aggressive tax planning and will more than likely be attacked by HMRC. Indeed, HMRC have said that in the next 12 months they will be reviewing such employer sponsored pension schemes. This is why it is important that if you are setting up an EFRBS it must be constructed as a normal pension scheme in case the rules change.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.