By Howard Borsden, Financial Advisor
RIO DE JANEIRO, BRAZIL – If you worked in the UK and have left your pension in the UK, then now is the time to look at taking advice on transferring to a more tax efficient type of pension called QROPS (Qualifying Recognized Overseas Pension Schemes). The rules in the UK are changing from April 6th, 2012, and if you have looked at transferring and are not too sure, now is definitely the chance to make a decision.
There has been a lot written over the last five years about the benefits of QROPS, and the various jurisdictions offering it, some successful and some not so.
However, as the market for QROPS has evolved and expanded, and as the bigger issues concerning jurisdiction have been highlighted by various tax authorities around the world, OECD (Organization for Economic Co-operation and Development) and the like, it is becoming more important for advisors to consider what is the best jurisdiction from a tax point of view as well as a regulatory one, when advising their clients on transferring their UK pensions to a QROPS.
Most, though not all, jurisdictions allow payment of any commutation (typically 25-30 percent) to be paid with no withholding tax, and income is also typically paid gross to a member. Much is made of this in various pieces of promotional literature on offer from various QROPS, providers. However, what is rarely discussed in open forum, is how various benefit payments are treated in the country in which the member is tax resident, and how the underlying contract is looked upon from a tax perspective.
In the current world in which we live, with major economies suffering severe financial crises, and looking for ways in which to re-build their finances, is it advisable for clients and their advisors to rely upon the belief that, just because something has not been challenged in the past, it will not be done in the future? Ireland has recently imposed a new tax (temporarily) upon the asset value of their pension funds, and reduced the “fund cap” substantially.
The majority of QROPS, are set up under a Trust Deed & Rules with independent Trustees being responsible for the implementation of said Deed & Rules, with the member being the beneficiary. This would therefore indicate that such a structure might be treated as a Trust in a beneficiary’s tax jurisdiction in the absence of a DTA (Double Tax Treaty) which would recognize officially the underlying structure as that of a pension fund. Whilst at a glance, this might not seem substantive, it might well become important to the beneficiary who is in receipt of, or entitled to payments from such a structure.
Certain jurisdictions around the world give preferential tax treatment to income paid from a pension or a pension annuity. In some countries such as Spain, the definition of a pension annuity is somewhat blurred, and different local tax inspectors, will have a different view.
However, if a Spanish Tax resident beneficiary for example, can convince his local tax inspector that income from his QROPS, is an annuity, there are substantial savings to be had. If the underlying QROPS, contract is viewed just as a Trust without the legal standing granted to it through a bilateral DTA, clients and their advisors might be taking an unnecessary risk, when such a contract is available through an EU member state, which the Spanish Tax authorities are obliged to recognize. There are other countries within Europe that have certain types of taxes.
Much has been made of the volume of business going to the various jurisdictions, as if this was some sort of justification for their use. The off-shore jurisdictions were first into the QROPS, market and have spent the last five years trying to find ways of improving their offerings, increasing commutation entitlements from 25-30 percent, the 50c legislation in Isle of Man, and new pension rules in Gibraltar.
In these uncertain times, when tax authorities are looking to maximize revenue, particularly for those clients in sophisticated tax collecting countries, is using an off-shore solution really the best way forward?
QROPS, as most people are now waking up to, are not “approved” by HMRC (Her Majesty’s Revenue and Customs), merely “recognized” as a statement of fact, based upon the application made to it for a QROPS, reference number. The only guarantee of the underlying status of the QROPS, and that it is acceptable to HMRC will be if the pension fund is properly regulated by the right authorities in a country which has a suitable bilateral tax treaty with the UK.
Why are advisors turning to Malta?
Malta, as depicted in a recent article, may be the “new kid on the block”, but is it now time to look at the underlying regulatory certainty, and the tax treaty protection proffered by Malta in comparison with other off-shore commercial centers.
Regulated: In Malta, the MFSA (Malta Financial Services Authority) regulate pensions as a specific activity, and every individual pension fund and their administrator is specifically licensed. A list of these is available on the MFSA website, along with the regulations governing such pension funds.
Legislation: Maltese domestic pensions’ legislation is very similar to that in the UK, unlike other jurisdictions where there is either limited legislation, an unenforceable “code of conduct”, or other non-binding agreements intended to prevent the abuse of HMRC requirements.
Audit trail: In Malta, every pension fund is required by law to have an independent audit submitted to the Regulator, the headline figures for which are available for member scrutiny.
On-shore/Off-shore: Historically off-shore jurisdictions were considered the only place in which QROPS, for non-residents could be set up, but with the uncertainty over the domestic rules and regulations, and whether the underlying contract had any legal recognition, Malta can now offer the same tax benefits with the certainty of HMRC approval and Tax Treaty protection.
Tax Treaties in force: At the time of writing 56 (including all EU countries) and due to increase.
Certainty: Malta, as an EU member state (sponsored by UK) with the DTAs mentioned above, gives not only tax treaty protection to pension scheme members in over 56 other countries, but also certainty as to how HMRC must view its regulated pension funds. HMRC cannot legislate currently or retrospectively against the pension rules of another EU member state.
If you want certainty and tax treaty protection for your pension fund when you transfer it to a QROPS, there is only one jurisdiction that currently offers this, and that is Malta.
* This is a paid Advertorial for Looking for Dylan.
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