By James Pearcy-Caldwell
15th March 2017
Many advisers woke up last Thursday morning aware their pipeline QROPS business had just been vastly reduced, says James Pearcy-Caldwell, co-founder of fee-based adviser Aisa International.
But last week’s UK Spring Budget heralded an opportunity for advisers, as clients need advice more than ever. The dichotomy for advisers is earning a living while not relying on purely transaction based remuneration.
This is aimed at demonstrating 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 8 March the UK chancellor announced HMRC would seek to apply a 25% tax charge on several types of transfer, or indeed at any point in the next five years if circumstances change.
It is critical to understand that change in the circumstances could be due to changes in the EEA and in relation to Brexit as well as for individuals.
For example, let us examine advice for an EEA based individual holding a Euro denominated QROPS, who 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.
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 UK’s lifetime allowance for pension savings, 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:
- Understand the clients objectives over the next six years, and then in retirement
- 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 needs 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 five-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.
Hence, for an adviser to recommend the most appropriate option and prove their value, they will need to take in to 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.
For more information on QROPS, please Contact us.