QROPS transfers: why all the fuss?
A qualifying recognised overseas pension scheme (QROPS) is a pension scheme established outside the UK which is broadly similar to a UK registered pension scheme. Members of UK registered pension schemes have a statutory right to request a transfer to a QROPS – this can be an attractive option for individuals who have built up their pension benefits whilst working in the UK but wish to retire abroad. So why all the fuss?
There are a number of tricky issues in relation to getting confirmation that the receiving arrangement is in fact a QROPS, dealing with related tax consequences if it transpires it isn’t, as well as practical challenges with obtaining appropriate independent advice in relation to the transfer.
In order to be granted and retain QROPS status (so that it is capable of receiving transfers from a UK registered scheme on a tax efficient basis), the overseas scheme must at all times satisfy HMRC’s strict conditions in relation to how it is regulated and the benefits it pays. For example, a QROPS must not permit transferred benefits being paid before normal minimum pension age (usually, age 55) – known as the “pension age test”.
If it subsequently transpires the receiving scheme was not in fact a QROPS when benefits were transferred to it, such a transfer will be an unauthorised member payment and will attract significant tax charges for both the member (up to 55% of the value of transfer) and the trustees (a scheme sanction charge of up to 40% of the value of transfer). It is therefore essential for members, trustees and third party administrators (acting on behalf of the trustees) to carry out an appropriate level of due diligence in relation to any QROPS transfer.
HMRC’s ROPS list
HMRC currently maintains a list of a recognised overseas pension schemes (ROPS) which have informed it that they meet the conditions to be a ROPS. But a scheme will only be issued with a QROPS reference number once the scheme manager of the ROPS has (i) provided evidence to HMRC that the prescribed conditions in relation to a QROPS have been met and (ii) agreed to adhere to HMRC’s various reporting requirements.
Earlier this year, HMRC took the step of writing to all QROPS providers asking them to reconfirm that they continue to comply with the prescribed requirements and temporarily suspended the list during this exercise. The revised list was issued on 1 July 2015 with far fewer schemes on it and, significantly, was renamed a “ROPS” list (as opposed to a “QROPS” list), to emphasise the point that this is a list of schemes HMRC considers to be “recognised” as opposed to “qualifying and recognised”.
The difficulty for members and trustees is that even once a scheme appears on the ROPS list and has been given a QROPS reference number by HMRC, this does not mean that all the information provided by the scheme manager has been verified by HMRC and so it does not guarantee the transfer will be an authorised member payment, free of UK tax.
Good faith discharge
If ultimately it transpires a transfer was an unauthorised member payment, there is one potential saving grace for trustees and administrators. Provided an appropriate level of due diligence was undertaken and the transfer was made in the reasonable belief that the receiving scheme was a QROPS at the time the member’s benefits were transferred, the scheme administrator may apply to HMRC to be discharged from the scheme sanction charge. When considering whether to exercise its discretionary power to grant a discharge in respect of the scheme sanction charge, HMRC will take into consideration whether, in all the circumstances of the case, it would not be just and reasonable for the scheme administrator to be liable to the tax charge. HMRC’s view of “reasonable belief” is likely to depend on the amount of due diligence undertaken in relation to the unauthorised transfer and so this begs the question – what is an appropriate level due diligence? The answer is not clear cut.
No check list of actions
HMRC’s guidance explains that there is no checklist of actions that constitutes appropriate due diligence because will it depend on the circumstances of each transfer request. As a minimum trustees/administrators are expected to (i) check the receiving scheme appears on HMRC’s ROPS list (and repeat this check no more than one day before making the transfer); (ii) ensure the member requesting the transfer has provided the prescribed required information and written acknowledgment; and (iii) keep records as evidence of all due diligence undertaken. The current ambiguity is a pressing issue for trustees and administrators who want to be certain that they are transferring members’ benefits to a QROPS and that they will benefit from a discharge of any liability should a scheme sanction charge apply. Given that transfers to QROPS (like any other statutory transfer) need to be made within the prescribed timescales set out in legislation, it will not be possible to simply refuse the transfer request or delay making the payment until such time as they have greater certainty, unless there is genuine cause to believe that the proposed transfer could result in a breach of the transfer rules.
How far to go?
As with any due diligence exercise, a decision will need to be made on how far to go. Clearly, the more due diligence undertaken, the more likely it is that the trustee will be able to benefit from the HMRC’s good faith discharge should it transpire that a transfer has been made to a scheme that does not fulfil the QROPS conditions. That said, given the potential cost implications and strict timeframes within which any transfer should be paid, any approach to due diligence will always need to be proportionate. It is therefore important for trustees and administrators to be clear and in agreement as to how QROPS requests will be dealt with and in particular know when it will be appropriate to escalate the matter to the trustees and their legal advisers.
It is common to see an escalating the level of due diligence undertaken depending on the number of “red flags”. For example, if there are pension scam concerns, an administrator may consider asking the member how they found out about the QROPS and also ask to see copies of the scheme literature and governing documents. This would form part of a “sense check” rather than a formal legal check and may highlight whether key requirements such as the “pension age test” are likely to be met.
One way of undertaking further due diligence is to ask the QROPS administrator for copy of form APSS251 by which it applied to HMRC for inclusion on the ROPS list, together with any supporting documents or answers it gave to HMRC’s questions concerning the application. Some administrators may also request a statement from the QROPS administrator that everything in the form remains true, complete and correct and consider writing to HMRC with the QROPS reference number asking for confirmation that the QROPS status isn’t under review. As a belt and braces approach, it is also possible to ask the scheme manager of the receiving arrangement to provide a legal opinion confirming the QROPS meets the legislative requirements.
Member liability and the requirement to take advice
Individuals transferring to a QROPS should be aware that there is no equivalent “good faith” discharge for members in respect of their tax liability. HMRC’s guidance therefore rightly highlights that members should “not rely on scheme administrators to carry out the checks” and that before agreeing to transfer to a QROPS, should obtain independent advice and confirmation from the receiving scheme manager that the scheme meets the QROPS requirements.
If members who wish to transfer to a QROPS have defined benefits (now known as safeguarded benefits) of over £30,000 in their UK registered scheme, they should also be aware that the legal requirement to take appropriate independent advice from a pension transfer specialist authorised by the FCA currently will apply. Trustees will also be required to check that a member who applies to transfer to QROPS in these circumstances has received such advice.
One practical challenge individuals are currently facing is that they may need to seek advice from both an FCA-authorised adviser in the UK and a local (overseas) adviser, unless they can find either an appropriately qualified UK adviser with overseas expertise for different QROPS jurisdictions, or overseas advisers who have the necessary FCA passport to be able to give the appropriate independent advice in the UK. This is likely to mean paying for two sets of advice. Given the difficulties this can cause, the DWP is currently working with the FCA to ensure that the advice requirements operate as intended in this context.
The article first appeared on Pensions World.