Wednesday, February 29, 2012
Changes to tax regulations that aim to clamp down on the mis-selling of qualifying recognized overseas pension schemes (QROPS) will disproportionately affect Guernsey, which has a completely clean QROPS record with the UK tax authority, HM Revenue and Customs, according to a leading Guernsey QROPS provider.
Pryce Warner International Group says that if enacted, the proposed change, known as 'Condition 4', would mean that Guernsey residents and non-residents would pay the same amount of tax on QROPS pensions. However, as QROPS are primarily designed for expat individuals who are resident in one country but domiciled in another, QROPS providers in Guernsey are lobbying HMRC to exempt Guernsey from the new rules. They argue that this rule runs counter to the purpose of QROPS, will have no added benefit for HMRC and unnecessarily punishes Guernsey, the QROPS jurisdiction with the strictest guidelines on client protection.
QROPS are pension schemes established outside the UK with broad similarities to a UK-registered pension scheme. At present, the government provides tax relief on pension savings in UK registered pension schemes. When an individual transfers those pension savings that have benefited from these reliefs to another registered pension scheme or to a QROPS, the transfer can be made free of UK tax where it does not exceed the lifetime allowance. The allowance is currently GBP1.8m, but from April 6, 2012 this will reduce to GBP1.5m.
According to HMRC, the government allows these tax-free transfers because they enable people permanently leaving the UK to simplify their affairs by taking their pension savings with them to their new country of residence. However, the government has found that QROPS are being marketed by some territories as a way of paying amounts or enabling the payment of amounts that are not allowed under UK rules (in particular 100% lump sums) once UK tax rules no longer apply to counter tax avoidance.
David Retikin, Director of Operations at Pryce Warner International Group, said: “Condition 4 is rightly designed to clamp down on the types of mis-selling that have been seen in jurisdictions such as New Zealand and Hong Kong, but it will disproportionately affect Guernsey, which has a completely clean QROPS record with HMRC.”
“Guernsey providers are right in their attempts to correct this prior to April 5 as it may cause significant damage to the Guernsey pension market. It is strongly possible that HMRC will drop this provision for Guernsey providers, as the provision holds no benefit for HMRC itself. Condition 4 only affects whether or not scheme members pay tax in Guernsey, not the UK, meaning it should be something for the local government to decide themselves and not HMRC. Allowing HMRC to dictate the practices of Guernsey’s government would be resoundingly unfair,” Retikin said.
The firm said although it is possible to make Guernsey QROPS compliant with Condition 4, providers are reluctant to do so as it means a higher rate of tax on members, which providers fear will damage the market.
As a contingency plan, the Guernsey government and industry have drawn up a new pension scheme that would meet the requirements of Condition 4, called Section 157(E), due to be considered by the States of Guernsey in March. According to Pryce Warner International, the key features of the new pension scheme are that:
Members of an existing scheme can transfer to the new 157(E) scheme and receive the following benefits: no contribution limits; normal retirement age still 55; maximum 30% lump sum; no upper age limit on taking benefits; and, transfers from other Guernsey pension schemes will be subject to 20% tax on Guernsey tax relieved funds.