What Are The QROPS Brexit Implications?
QROPS BREXIT…what does it all mean and imply? In a historic referendum that was held on June 23, the British voted for a Brexit from the European Union. The outcome of the referendum sparked rapturous celebrations among the Eurosceptics across the UK and caused shock waves to ripple through the global economy.
What comes next is for Britain to formally inform the EU of its decision to withdraw – the first time in history that the European Union’s Article 50 will be used. However, as QROPS Brexit proponents celebrate, there is a lot of uncertainty over the future of certain international agreements that Britain has with the world, including those relating to Qualifying Recognised Overseas Pension Schemes1 and related investments.
The legislation that set up QROPS was first introduced in 2006, allowing overseas pension schemes to accept ‘relevant transfers’ from UK based pension funds without incurring unauthorised payment charges. The scheme was devised as a way of freeing up HMRC2 from having to take care of the large amounts of paperwork necessary when dealing with individual applications.
Why QROPS Are Such An Attractive Option To Expats
Expat Britons have made use of international pensions as they offer significant tax benefits and flexible investment options. There are other features as well that appeal to international workers including:
- Consolidation: Putting different retirement savings schemes and pension plans into one fund makes management simpler and cuts costs. Consolidation helps to tie up administrative loose ends including differing start dates for pension schemes as they are all aligned at 55 years old.
- Moving To A New Overseas Location: When onshore retirement funds are switched to a jurisdiction like Malta or Gibraltar, the retirement saver is able to move to any place they wish without having to switch pension schemes. By eliminating the need to move their money each time they move to a different country, they can save on the associated costs.
- International Service Providers: Portable pension schemes allow expatriates to take full advantage of the financial and tax benefits3 available in offshore jurisdictions4 even if they currently live in a country with no providers.
- Foreign Currency Advantages: Because schemes offer payouts in a number of major international currencies, savers can avoid issues with juggling of exchange rates.5
- Savings Are Beyond The Government’s Reach: Although the scheme operate under the supervision of HM Revenue and Customs (HMRC) and have UK ties, they remain unaffected by certain restrictions that UK-based pension schemes are subject to, including taxation and lifetime allowance.
Will QROPS Brexit Impact Expats?
While the politicians squabbled over whether to remain in the European Union or to leave, many expatriates and international workers continued to fret about what QROPS Brexit would mean for their retirement savings and related investments. This is because, for many retirement savers, there is a level of uncertainty with regard to the impact of leaving the EU on their savings following the passing of the referendum.
The QROPS scheme was introduced as a means of matching the demand from the European Unionto make it easier for British expatriates and Europeans with UK pension savings but who have since moved elsewhere to easily access their funds.
According to legislation, certain international financial centres outside the EU are also allowed to offer overseas pensions to expatriates and international workers who have UK-based pension funds. We’ve prepared a detailed head-to-head comparison between qrops and sipps. Check our infographic!
HMRC figures released indicate that the financial centres offering these schemes are evenly split between EU member states and countries outside the EU. Furthermore,
About three quarters of QROPS schemes in operation are based out of non-EU countries. These figures would, on the face of it, seem to suggest that QROPS Brexit does not necessarily mean the instant demise of QROPS, as most of the jurisdictions are outside the control of the European Union and are not subject to its treaties.
However, savers who have already transferred or are looking to transfer their retirement funds to one should seek professional advice from an experienced and suitably qualified financial adviser to find out whether they are likely to be affected by QROPS Brexit.
Could Expat Pensions Be Pulled In The UK Tax Net?
Rights that international pensions holders currently enjoy, that could disappear, includes the ability to transfer pensions offshore. Moving to overseas based pension plans can result in very large and totally legal tax savings for retirees. Do you want to receive all the benefits from your international pension plan? If so – do NOT miss our detailed articles! Be prepared and well informed.
However, it’s important to remember that this arrangement is only in place due to the UK losing a lawsuit in an EU court. It is quite conceivable that the UK could shut down the transfer of pensions as soon as it officially leaves the EU. If a saver has accumulated pension savings of say £500,000, they would most likely fall within the 40% tax bracket when they draw down their funds or need to pass it on to their loved ones.
However, if they are an expatriate worker and a member of a qualifying scheme in some popular EU jurisdictions like Malta or Gibraltar, they would likely only need to pay about 2.5% in flat rate tax and would not be liable to pay any inheritance tax.
This means that, in such a case, HMRC loses out on a whopping £200,000.
With this in mind, and when you think that there are even larger pensions that are into seven figures, it quickly becomes apparent that HMRC loses out on significant potential revenue due to being an EU member and signing these kinds of cross-border taxation agreements.
It is therefore likely that the post-Brexit UK government will move to change the regulations to recover some of this ‘lost’ income.
A Look At Possible QROPS Brexit Scenarios In Larger EU-Based Jurisdictions
At this point in time, trying to comment on economic forecasts or second-guessing what is likely to happen in investment, financial and currency markets is a futile exercise, but there are some possible scenarios that could impact overseas pension schemes that can be envisaged, given the scheme’s history.
Although pension savers from the UK have always been able to transfer their pensions when they move abroad, it has been a very costly and time consuming process. An important point to note is that UK-based pension funds established since 2006 have operated using a self-assessment model.
This is largely because HMRC did not expect the scheme to grow into a commercial business.
However, as a number of jurisdictions and trusts started to apply for ‘reference status,’ the industry really took off. With the unexpected growth, HMRC started to tighten what it believed were badly drafted and lax regulations.
In the few years that followed the programme’s launch, several jurisdictions that did not have pension legislation that closely corresponded to that in the UK were removed from the scheme. The removal of some of the larger EU jurisdictions that do not conform to UK regulations is a possible consequence of Brexit.
Another issue that could fundamentally undermine thanks to the QROPS Brexit vote is that it may become more difficult for UK nationals to emigrate to EU member states, though some governments may still encourage British expatriates to live in their countries and spend money there.
This may make moving their existing pensions a complicated affair, with the rapidly changing investment and political climate in Europe.
A Transfer Makes Sense In The Light Of The Brexit Vote
For British nationals and other overseas workers who have UK-based pensions, it makes a lot of sense to complete a pension release if they plan to permanently emigrate from the UK. The fact that so many QROPS are non-EU based means that there could still be opportunities for investors in pension schemes to benefit from the program in different jurisdictions even after Britain officially exits the European Union.
However, for retirement savers who plan to take advantage of EU-based QROPS, it’s recommended that they receive sound advice from a financial expert, as some QROPS benefits available to scheme members may soon become unavailable.
QROPS BREXIT. What’s Next?
Make sure that you take action before the full implications of QROPS BREXIT come into force whatever they may be. They often grandfather in various plans so if you act now you might still be able to benefit from QROPS. Start by downloading our free guide and see if it is a good fit for you. Alternatively, read our detailed QROPS FAQ.