This article was originally published in International Adviser in March 2017.
Many advisers woke up last Thursday morning (9th March 2017) aware that their pipeline business, and thereby possibly a big chunk of their living, had just been vastly reduced. Last week’s Spring Budget nailed QROPS but actually heralded an opportunity for quality advisers, as clients now need proper advice more than ever. The dichotomy for advisers is earning a living whilst not relying on purely transaction based remuneration.
The idea of this article is to demonstrate to advisers, who wish to carry on advising on UK pensions, how they can add value to a client through risk based options and how that leads to remuneration that is not transactional based. Advisers have considered QROPS from a product perspective based upon perceived benefits and, until now, the headline benefits have often supported the product. On the 8th March the Chancellor announced HMRC would seek to apply a 25% tax charge on several types of transfer, or indeed at any point in the next 5 years if circumstances change.
It is critical to understand that change in the ‘circumstances’ could be due to changes in the EEA and by Brexit, as well as those for the individual.
For example, let us examine advice for an EEA based individual holding a Euro denominated QROPS that moves to a non-EEA country such as Switzerland. In the future, this would trigger a 25% tax charge from a pension transfer up to five full tax years before. Or consider someone with a pension in Gibraltar who is not retiring there. What happens if Gibraltar is no longer part of the EEA? Or how about an individual returning to live in the UK after Brexit who holds a QROPS in the EEA; will they have a 25% tax charge applied in the future? Will some grandfathering rule cover this? If so, it is not prescribed in the legislation.
These scenarios are very real and a potential threat to all clients, financial advisers and trustees. The method by which HMRC will expect tax to be paid is similar to FATCA rules in the USA, with the responsibility being on those who report to HMRC; this will be the QROPS trustees, who should ensure the tax is paid or will they become personally responsible, as trustees are likely to in the UK?
Best advice in a “post truth” world
For some time, recommending QROPS to residents of certain countries such as the USA or indeed the UK itself has been extremely contentious. A QROPS was barely justifiable for residents of jurisdictions like South Africa unless they held very large pension funds in the UK. For those with funds of less than the LTA, double tax treaties and special provisions available have largely led to best advice being to retain a UK pension.
The new 25% tax re-enforces ruling out QROPS as an option unless someone living outside the UK will retire in the same country where their QROPS is based or is EEA based as well as the QROPS.
With the EEA changing, and many EU countries seeking to tax QROPS benefits or include them in wealth tax declarations, the notion of moving a UK pension to a QROPS as standard practice is further eroded.
Does this mean UK pensions become the less risky option and do the April 2015 ‘flexibility on access’ rules make them the best option? To answer this, an adviser needs to:
1. Understand the clients objectives over the next 6 years, and then in retirement.
2. Grade the implications of Brexit in terms of the risk to the investors objectives.
Consider Gibraltar’s QROPS proposition for example. Whether the UK / Gibraltar remains a part of the EEA or not could be a fundamental risk to an investor paying a 25% tax charge. Advice options are:
- Leave the UK pension where it is and manage it.
- Leave the pension in the country currently but transfer to a different trustee or manager and consider currency options.
- Recommend an annuity with guarantee, and consider currency.
- Move the pension overseas.
- Move the pension back to the UK.
None of these should be considered in isolation. A sensible way to approach this for an investor would be to grade or assess each area for risk against the investor’s objectives.
For many overseas locations outside the EEA, such as the USA, South Africa, and the Middle East, it is highly unlikely a QROPS will be graded as anything other than extremely high risk, therefore ruling out any recommendation for a QROPS. Gibraltar QROPS become riskier than Maltese options, and so on. All risks applicable to an investors circumstances need to be taken into account thus demonstrating to clients your worth and value as an adviser.
HMRC has a track record in these areas so it is likely that the current 5 year rule will probably only go in one direction, and may well be extended if previous experience of QROPS reporting requirements provide us with any guidance.
The facts have been there all along, the warnings implicit. Indeed, positive facts have not been on the side of QROPS for some time, but we live in a world where facts are often second place to headlines. Headlines have outweighed reality, inciting people to transfer their pension to QROPS to avoid UK tax, obtain “improved flexibility”, better death benefits or larger tax free cash sums, or to get access to supposedly “better” investments.
Hence, for an adviser to recommend to an investor the most appropriate option, for an adviser to prove their value, an adviser will need to take into account a range of factors that, to date, have largely been ignored offshore. This is a great opportunity for quality advisers to show their worth when advising investors and build strong relationships with loyal clients.
This article was originally published in International Adviser in March 2017, and you can click on the link below to read the article there: