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Changes to the QROPS regime: Crackdown on UK to NZ pension transfers

The UK qualifying recognised overseas pension scheme (QROPS) regime has been the subject of recent change. Regulations introduced by the UK Government, effective from 6 April 2012 (the start of the UK tax year), targeted NZ QROPS providers (among others) with the result that many have had to review their eligibility as a QROPS and make changes to their compliance processes.

What is the significance of QROPS status?

UK residents may transfer pension savings out of the UK without triggering a UK tax liability provided the transfer is made to a QROPS. By contrast, transfers to non-QROPS may incur a significant tax cost (up to 55% of the transferred value).

Non-UK pension schemes wishing to obtain QROPS status must notify HM Revenue & Customs (HMRC) that they meet the relevant requirements and undertake to provide certain information to HMRC. This system is designed to ensure that those transferring their pension savings to schemes outside of the UK are broadly in the same position as those who remain in the UK.

Developments in QROPS regulations

Prior to the changes, NZ schemes could qualify for QROPS status while providing members with the ability to withdraw their transferred pension savings as a lump sum. This was contrary to HMRC’s intention that transferred funds be used for retirement purposes.

The changes to the QROPS regime are intended to ensure that the system is used legitimately to further the purpose for which it was designed. The use of NZ schemes to access UK pension savings as lump sums has now been reigned in.

Steps to becoming a QROPS under the new regulations

The four tests that a scheme must meet in order to be a QROPS are summarised in Appendix 1. The changes brought in by the regulations are detailed in Appendix 2. Under the new regulations KiwiSaver schemes will continue to be eligible for QROPS status. Non-KiwiSaver schemes may still be QROPS if the transferred funds cannot be accessed earlier than would be possible under UK law and at least 70% of the funds transferred will be used to provide the member with an income for life.

The reporting requirements imposed on QROPS providers have also changed. Payments made to a member must now be reported for a period of at least 10 years from the date of transfer out of the UK, regardless of the member’s residency. This supplements (rather than replaces) the existing reporting requirement for payments made to members who have been UK resident within the past five years. A QROPS will now have to report to HMRC a payment out of transferred sums unless:

(a) the individual is not an UK resident; and

(b) the individual has not been an UK resident at any time in the five full tax years before the payment; and

(c) 10 years have passed since the transfer was made.

The status of schemes which previously qualified as QROPs is still in doubt and there are a number of differing views on the market as to the potential UK tax implications of making withdrawals from these schemes. Equally, however, the tax status of UK pensions held by New Zealand residents is also unclear. IRD’s previously expressed view that such pensions would constitute FIF interests, subject to current taxation under the fair dividend rate (FDR) method, may have changed given the recent changes to the QROP regime. The area of pension cross-border pensions raises a number of difficult tax issues and investors need to ensure they are getting reliable advice.

One Response

QROPS Pensions on August 21, 2012 at 8:04 am

Interesting piece of writing, you always write the most useful content &
TalkTax is no exception to this rule!

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