A big change in the UK to the taxation of Qualified Recognised Overseas Pension Services (QROPS), offshore pensions usually used to move a UK pension out of the UK for an expat, will have significant changes on the pensions of UK citizens living in South Africa. Many UK expats have been advised to transfer their UK pensions to QROPS for pension tax efficiency. In many cases these transfers were poor advice and not based on an accurate assessment of the tax environment. The Chancellor has announced changes that will tax certain QROPS transfers but not tax others.
According to Mike Abbott, Head of Wealth at Sable International: HM Revenue and Customs (HMRC) have stopped the practice of moving UK pensions out of the UK and into offshore locations (different to where the client is resident) by applying a 25% tax to those transfers.
“Sable Wealth has historically done very few QROPS as they are usually not necessary or not-advisable. In most cases the advice was based on a one-sides view of the UK tax treatment of UK pensions. The result is often a substantial increase in the cost of the pension (not to mention the transfer advice costs!) with very little or no change to the tax treatment. As dual-licensed authorized advisors for the UK and South Africa, we are able to advise these clients on the offshore and or UK pension transfer options they have within the UK, and on the tax planning required when drawing down that UK based pension into a foreign location, such as South Africa”, said Abbott.
Abbott urged UK expatriates considering a QROP transfer to seek the advice from a financial advisor with license in the UK and SA.
“This is a game changer,but the change has been brought about to protect pension investors and as such we see this as a good change. Legitimate QROPS transfer like when someone returns to their home country are out of scope of this new tax charge. ”, he added.
Abbott noted how QROPS will affect South Africans or UK expats living in SA:
* Transferring QROPS to South Africa would make it an RA with the local providers, making it more expensive in ZAR and subject to the local regulations and investment restrictions;
* It would also remove the portability of the pensions for South Africans who may emigrate in future;
* Other (non UK licenced) offshore IFAs operating in SA can now only transfer to SIPPS offered by the QROPS providers as they cannot access the UK Mainland onshore providers. These offshore SIPPS are typically priced similar to QROPS and are therefore considerably more expensive.
Who is affected?
* Individuals who request an overseas pension transfer on or after 9 March 2017
General description of the measure
* This measure ensures that transfers to QROPS requested on or after 9 March 2017 will be taxable unless, from the point of transfer, both the individual and the pension savings are in the same country, both are within the European Economic Area (EEA) or the QROPS is provided by the individual’s employer.
* If this is not the case, there will be a 25% tax charge on the transfer and the tax charge will be deducted before the transfer by the scheme administrator or scheme manager of the pension scheme making the transfer.
* It also widens the scope of UK taxing provisions so that, following a transfer to a QROPS on or after 6 April 2017, they apply to payments out of those transferred funds in the five tax years following the transfer.
Abbott pointed that the measure was introduced as it supports the government’s objective of promoting fairness in the tax system. “It continues to allow overseas transfers from pension schemes that have had UK tax relief that are made when people leave the UK and take their pension savings with them to their new country of residence,” he added.
The overseas transfer charge will have effect for transfers requested on or after 9 March 2017 and the extended taxing provisions on payments out of QROPS will have effect on and after 6 April 2017.
Legislation will be introduced in Finance Bill 2017 so that:
* Transfers to QROPS requested on or after 9 March 2017 will be taxed at a rate of 25% unless at least one of the following apply:
* Both the individual and the QROPS are in the same country after the transfer
* The QROPS is in one country in the EEA (an EU Member State, Norway, Iceland or Liechtenstein) and the individual is resident in another EEA after the transfer
* The QROPS is an occupational pension scheme sponsored by the individual’s employer
* The QROPS is an overseas public service pension scheme as defined at regulation 3(1B) of S.I. 2006/206 and the individual is employed by one of the employer’s participating in the scheme
* The QROPS is a pension scheme established by an international organisation as defined at regulation 2(4) of S.I. 2006/206 to provide benefits in respect of past service and the individual is employed by that international organization
* UK tax charges will apply to a tax-free transfer if, within five tax years, an individual becomes resident in another country so that the exemptions would not have applied to the transfer
* UK tax will be refunded if the individual made a taxable transfer and within five tax years one of the exemptions applies to the transfer
* The scheme administrator of the registered pension scheme or the scheme manager of the QROPS making the transfer is jointly and severally liable to the tax charge and where there is a tax charge, they are required to deduct the tax charge and pay it to HM Revenue and Customs (HMRC). This applies to scheme managers of former QROPS that make transfers out of funds that have had UK tax relief, if the scheme
is a QROPS on or after 14 April 2017 and at the time the transfer to the former QROPS is received
* Payments out of funds transferred to a QROPS on or after 6 April 2017 will be subject to UK tax rules for five tax years after the date of transfer, regardless of where the individual is resident
Abbott concluded that Sable Wealth is both dual licensed and holds the UK Pension Specialists permissions and is therefore ideally placed to advise on both sides – the UK and South Africa.
Issued by Catalyst Communications