According to a recent report in the Telegraph newspaper, HM Revenue and Customs is cracking down on QROPS offshore pension schemes as many jurisdictions have seemingly exploited the potential benefits that these schemes can deliver.

QROPS – or Qualifying Recognised Overseas Pension Schemes, also referred to as offshore pensions – were seen by many as a revolution in expatriate pension planning; but there are no two ways about it, the crackdown will really restrict their usefulness and attraction.

One of the most heavily marketed benefits of these schemes was that there was no requirement for an account holder to use the accrued benefits to buy an annuity – however this goes totally against what HMRC want policy holders to do, and is likely to be a benefit lost.  In this article we look at the likely changes to these schemes and the impact these changes will have…

What’s HMRC’s Problem With QROPS?

To be allowed to host and market QROPS, qualifying jurisdictions had to comply with HMRC guidelines on how the schemes should be structured – but as is often the case when a new investment scheme or structure is introduced, these guidelines were vague in certain areas, and this vagaries were seized upon by investment managers in an effort to make QROPS perhaps appear even more enticing!

Having seen how the development of the product has gone on, HMRC are now clearly aware of the loopholes that they need to close, the guidelines they need to tighten and the action they need to take to make sure these pension schemes deliver only that which HMRC deems appropriate.

Tax on Pension Income

For example, for continuing to receive tax relief on deposits made, HMRC believe that an account holder should not be able to escape taxation on benefits received when they come to retire.  So this will be something that’s monitored carefully when it comes to the jurisdiction in which one of these offshore pension schemes is established.  Furthermore, HMRC are aware that there are some people who have moved all of their pension savings into one of these structures and are now waiting out the 5 year disclosure period – once ended they intend to take all of their pension benefit in a lump sum to do with as they please.  However, HMRC’s view is that they should be forced to buy an annuity with a given percentage of their accrued pension pot.  So this is another loophole to be closed up.

No Extra Expat Pension Benefits

As Mike Morrison, the head of pensions development at Winterthur Life said in the Telegraph report into this issue: “HMRC will look carefully at whether the jurisdictions for QROPS have a legitimate pensions framework.  The point of these plans is to allow people to move abroad and take their pension scheme with them – they’re not meant to be a way to get additional benefits.”  Therefore, anyone looking at QROPS or who already has an offshore pension in place needs to be aware that all schemes are likely to be brought in line with current British pension rules and regulations.

What to Do if You Have an Offshore Pension

Certain offshore jurisdictions have already been refused the right to host these schemes – Singapore was delisted last year for example.  And as HMRC’s investigation into this entire issue continues, it’s likely that other offshore tax havens will be impacted, schemes will be delisted and individuals will suffer.  So, our advice to you is, speak to your financial adviser about this issue as soon as possible if you believe you are affected, and find a workable and legitimate solution for you and your retirement savings pot.