It’s a year since the 2012 UK Budget put over 95 per cent of the third way QROPS product providers out of the market[i]. Given the changes to UK’s QROPS qualifying criteria many commentators spelled this as the end of the UK cross border pension transfer market. So with the 2013 UK Budget just passed and a full year under our belts where do we stand and what does it mean for clients, advisers and the QROPS market?
Since April 2012 we've seen volumes in QROPS business fall by circa 37.5 per cent with an estimated 5,000 transfers as opposed to 8,000 in 2011, prices rise due to shortages in the supply chain, operational efficiency and servicing standards fall as remaining firms struggle to cope with volumes, significantly less product and increased complexity as the remaining jurisdictions try to fill the gap left by Guernsey's exit. However, the greater predicament for the market is that currently there is no single jurisdiction which offers the full set of benefits in the way Guernsey or indeed the Isle of Man did, but this might change as Switzerland and Ireland look to potently increase their appeal to the non-resident client.
This article aims to provide a general ‘aide memoir’ to assist readers compare and contrast legislative and jurisdictional points of difference so that these can be matched to the requirements of clients before considering which provider to use.
Compare and Contrasting of QROPS Jurisdictions
Understanding what the legislation allows is arguably the most important aspect around the selection of the QROPS jurisdiction as it dictates the investment environment, when benefit can be taken, the level and type of benefit and implication from a tax perspective. Table 1 lists some of the main legislative features at jurisdictional level and what is very apparent is that no one jurisdiction provides a significantly better proposition than another in all areas. However, and depending on a client’s requirements, certain jurisdictional features may prove more desirable given the clients objectives and therefore it is client needs that will prescribe the jurisdictions of choice.
All jurisdictions offer international members access to benefits from the age of 55 and provide access prior to this date through ill health provisions with the exception of New Zealand which also has a hardship clause which can be invoked after five years of non-UK residency at the discretion of the trustees. This feature may prove attractive for the member who is still working and has not reached retirement age as it provides a form of income protection should economic hardship be encountered such as unemployment.
New Zealand schemes are the only schemes not to have a mandatory date by which benefit must be taken (benefit crystallisation). For many clients this is irrelevant as benefit will be drawn from retirement which is typically between 60 and 65. However, for those clients that have no need for income from their plans, this option means they are not forced into a position where income has to be taken which invariably results in an income tax liability in their country of residence and potential a withholding tax in the QROPS jurisdiction. This option also gives advisers the ability to turn on an income stream in later life, if needed by their client, and given current life expectancy this feature could prove very beneficial where phased or portfolio retirement planning is used.
All jurisdictions allow a pension commencement lump sum of 30 per cent of the scheme value. However, there are two variances to this which are very noteworthy. Firstly, Maltese schemes are not subject to the 70 per cent rule due to their route of QROPS qualification and therefore where the scheme secures a prescribed minimum regular income benefit the scheme can make additional lump sum payments to the member from the plan's capital. This does require a scheme to have a minimum value of circa £500K and upwards in order to secure an income at the prescribed level but this feature is particularly beneficial where an enhanced income or access to capital is needed. Taxation of these additional lump sum payments is an important consideration and if structured correctly can prove very efficient, particularly for USA residents. Secondly, under a New Zealand scheme the 30 per cent commencement lump sum is restricted to the tax relieved contributions only and therefore additional non-tax relieved contributions and growth can be paid in addition to the 30 per cent after five years of non UK residency. This means that these schemes can provide a larger total commencement lump sum whilst ensuring compliance with the QROPS legislation as the 70 per cent rule is strictly applied to UK tax relieved funds.
Regular Income Benefit
All jurisdictions follow a very similar approach in terms of the level of regular income that can be generated within the first five years of UK non-residency and link benefit payments to the UK Government Actuarial Department (GAD) tables. However, after five years of UK non-residency retirement benefit can be calculated on an independent actuarial basis from the Isle of Man, Malta and New Zealand and it is expected that Gibraltar will follow suit even though the current interpretation limits this to 120 per cent of GAD. This means that the regular income that can be achieved from a scheme is relatively on par across jurisdictions.
When it comes to the taxation of regular pension benefits at source, New Zealand offers the simplest solution as there is no withholding tax on the pension benefits. Malta, and to a much lesser extent, the Isle of Man have the ability to pay gross where a double tax treaty (DTA) exists with the members country of residence. Without such a treaty withholding tax can be as high as 35 per cent in Malta and 20 per cent in the Isle of Man. The downside of having to rely on double tax treaties is that if the member moves from one country to another and the new country of residence is not covered by a DTA this could in invoked a significant withholding tax. Gibraltar on the other hand opted for 2.5 per cent tax on all pension distributions, excluding the commencement lump sum. This means that for a very low rate of tax the complexity that DTA’s bring can be mitigated.
Most jurisdictions do not apply any withholding tax to death benefit payments, however, under certain circumstances an Isle of Man scheme could be liable to levy a 7.5 per cent charge on the death benefit.
The Isle of Man and Gibraltar offer the Guernsey style investment environment of open architecture investing whereas Malta and New Zealand are more restricted due to their legislation. Maltese schemes have to appoint an investment manager and the underlying assets have to meet diversification rules. If a financial adviser is appointed as an investment manager to a Maltese scheme and they are based in the EU then the financial adviser has to be licenced in accordance with MiFiD and not the IMD as investment management is a defined activity which requires legislation and regulation. It is also questionable if an adviser who is not licenced to deal in securities, irrespective of their location, can be appointed which means that appointing a 3rd party discretionary investment manager to manage the assets is the course of least risk to the trustees and adviser. New Zealand on the other hand has rules that require a minimum number of investors per investment type or security. So theoretically this allows total open architecture but practically it does not. Hence the appointment of a fund manager to run the assets of the scheme is the prudent route for the trustee.
When selecting a jurisdiction it’s not just about the pension legislation. It’s also about the jurisdiction’s ability to deliver the service and their commitment both politically and economically to the proposition, the levels of expertise, experience and depth of the labour market available to deliver the service in an efficient and cost effective way. Other factors such as investor protection, dispute mediation and international standing are also key points to look at. Then there is the provider themselves and their standing, time in the market, systems, processes and people. 2012 saw both a Maltese and New Zealand scheme being removed from HMRCs list because of administrative issues. This is unforgivable when holding out to be a pension administrator given the importance of these products to individuals. Table 2 provides an interesting set of comparatives to consider from a jurisdictional operating perspective.
Switzerland has a very well founded and regulated retirement sector and its local rules allow significant flexibility, including encashment, so that members can use their accumulated retirement funds for securing retirement provision. This in itself is a common principle and is seen in New Zealand, Australia and South Africa but the risk is that the jurisdiction is simply used as a wash through for non-resident member to cash in pensions in the same way that New Zealand was abused. Ireland has recently made noises around opening up its legislation for international members and as a jurisdiction it has significantly more flexible benefit options than the UK and is not restricted to the 70 per cent rule given its EU membership. Whilst Switzerland may be an accident waiting to happen, Ireland’s entrance could be just what the markets need in terms of a large well regulated jurisdiction with a highly competent and skilled work force.
What can be gleaned from the above is that it’s about the jurisdiction of ‘relevance’ ie, relevance to the client’s needs and no longer simply a jurisdiction of ‘choice’ as Guernsey was. If it’s gross paying, low cost and simplicity that the client wants or the ability to defer taking income New Zealand seems to win out but the investment choice is very restricted. If it is the ability to secure an income and draw down on the capital quicker via an additional withdrawal option then Malta looks like the place to be, but costs are high, and there is a reliance on DTA’s to avoid withholding tax. When it comes to years of experience, access to expertise, systems and people together with well-established investor protection and the presence of an ombudsman to protect client interests the Isle of Man and New Zealand are equally matched. For simplicity and where investment flexibility is a key requirement then Gibraltar looks like a smart option but it comes at a cost of 2.5 per cent withholding tax on regular income benefits, which may prove to be money well spent.
The words of the Rolling Stones 1969 hit sums up the market, “You can’t always get what you want… but you can get what you need”. Therefore it’s vital for advisers to be able to identify and prioritise a client’s key requirements and objectives so as to best match them with a jurisdiction, knowing that compromise is now almost certainly unavoidable.
*All information provided in this article is generic information and should not be taken as advice or relied upon as such and is subject to changing legislation.
[i] The QROPS Report, 2012
Rex Cowley is a co-founding member of the specialist international pension provider Overseas Trust and Pension and active pension and retirement practitioner. He is also an authority and author on international pensions and the founder of the consultancy and research practice NewDawn. Rex sits as an independent on industry expert panels and expatriate financial clinics and lectures on retirement and pension provision around the world.