Avoiding Offshore Pension Tax Traps
What happens if you are in the offshore pension no man’s land of transferring your UK pension fund to a QROPS pension scheme only to have the taxman remove the scheme from the approved list?
The Treasury says that hundreds of transfers from UK pensions to offshore schemes called QROPS pension have been agreed – standing for Qualifying Recognised Offshore Pension Schemes.
In the vast majority of cases, the switch has run smoothly and the expats are enjoying the tax effective fruits of their labours.
But some investors in a Singapore scheme were left high and dry when the taxman withdrew recognition of their QROPS scheme after they had switched their funds to the scheme.
The Singapore Qrops Pension Scheme provider has appealed several times against the HMRC ruling to no avail and is refusing to release investors’ funds and is trying to re-qualify as QROPS provider in other jurisdictions to protect client funds.
In separate action, another Singapore-based QROPS firm left the country after receiving £21,000 in fines for allowing unlicensed advisors to speak to clients.
QROPS HMRC
HMRC can remove a QROPS pension scheme from the approved list of providers at any time but does not have to say why unless the unapproved provider agrees the information can be revealed.
Generally, the reasons for excluding a QROPS from the recognised list are:
· The provider asks for removal but the scheme is still a QROPS
· A scheme met the QROPS criteria on application to join the list but the scheme has stopped being a recognised overseas pension scheme, or is removed from the list for failing to keep the rules
· The scheme misled HMRC about QROPS status on applying to join the list
The UK taxman is also getting tough with other tax jurisdictions suspected of breaking the QROPS pension rules by offering pension busting deals like 100% tax-free drawdown of pension funds when the rules state a maximum of 30% of the total fund should be the maximum tax free lump sum available.
If your QROPS is disqualified, take immediate; professional advice from a UK regulated company with expertise in offshore pension schemes.
Your advisor will need to work out the dates when your UK provider transferred cash in to your QROPS.
· Transfers before the scheme was removed from the QROPS database are treated as recognised payments to a qualifying scheme with no tax penalties due.
· Transfers after the scheme was removed from the QROPS database may be treated as unauthorised payments that can trigger 40% tax penalties plus up to a 15% surcharge on the investor.;
Investors can appeal the unauthorised payment charge and surcharges on the basis that their UK pension provider is not allowed to make transfers to a non-recognised scheme.
The scheme manager should check with HMRC before sending any money to the QROPS scheme. HMRC advises fund managers to keep details of making this check on their files.
If the manager has transferred your cash to an unrecognised scheme in good faith then your liability can be discharged by HMRC.
QROPS Advice
Once the timeline is clear, your advisor can help you sort out the mess by negotiating with the UK and offshore providers.
Should negotiations reach a deadlock, HMRC guidelines are not forthcoming on what course of action should follow.
The last resort is expensive overseas legal action to regain your investment.
This sorry state of affairs can be avoided to some extent by consulting a top quality expert offshore pension advisor from the start.
When selecting an advisor, you should look to see they are regulated by the UK Financial Services Authority and have a track record in arranging QROPS pension schemes.
Your UK pension provider has the responsibility for checking any transfer of funds is to an HMRC authorised scheme before sending off the cheque – but you can make sure yourself by looking up the QROPS provider on the HMRC web site before authorising any transfer.
Of course, whatever precautions you take as an investor, you cannot always avoid bad luck or dishonesty on the part of a third party.
Many investors have found this out with the collapse of the highly respected Lehman’s Brothers Bank and multi-million pound scams run by the likes of Bernie Madoff.
The important fact to remember is that if someone offers a QROPS pension solution that seems too good to be true and promises benefits that are not available through similar schemes, then it’s likely it is too good to be true and somewhere along the line it’s all going to go wrong. Make sure you understand the full details of a QROPS pension before proceeding. Take proffesional advice!
