I am back from the UK with yet more details of pending QROPS changes! Please note that the items below are from the draft Financial Bill 2017 and amendments to overseas pension schemes regulations. It is possible that the passed legislation will contain variations from the consultative process.
The 5-year rule is to become the 10-year rule. This is no surprise and a logical outcome of the previous reporting requirements. A nasty UK tax surprise can arise on payments – including deemed payments from a foreign pension scheme (RNUKS – Relevant Non-UK Schemes) under the following Acts:
- Member payment charges under Schedule 34 Finance Act 2004; or
- The taxable property charges under Schedule 34 Finance Act 2004.
The latter is assets they don’t want held (like art collectables and certain real estate). Our focus here is on the first item – the member payment charges. Currently, if unauthorized payments are made from the Australian QROPS, they are taxed by HMRC if the member had been a UK tax resident in any one of the previous five UK tax years. The proposal is that this will – with effect from April 2017 – be extended to ten years i.e. if at the time of the payment the members is a UK tax resident or has been a tax resident in any of the previous 10 tax years. The reporting requirement is 10 years from date of transfer and so is slightly different. This extended time limit will only apply to:
- Transfers made from a registered UK pension scheme on or after 6th April 2017; and
- Pension inputs into an overseas scheme on or after 6th April 2017 that have benefited from UK tax relief.
The provision does not apply retrospectively for payments transferred before 6th April 2017. This causes extra constraints. Currently an onward transfer from a QROPS to an overseas scheme that is not itself a QROPS is not a recognised transfer. However where such an onward transfer takes place at a time where a scheme member has been resident outside of the UK for five complete and consecutive tax years, then no UK unauthorised member payment charge will apply. This period is doubled for new monies.
The Pension Scheme (categories of countries and requirements for overseas pension schemes and recognized overseas pension schemes) (Amendments) Regulation was subject to consultation until 1st February 2017 and contains some interesting provisions. Under these regulations, the 70% pension for life/30% lump sum rule is abolished for Non-EU Schemes provided the scheme is regulated and based in a territory with a Tax Information Exchange Agreement with the UK. This raises the possibility of Australian QROPS offering Flexible Access Drawdowns. There is also provision for short service lump sums or serious ill-health lump sums before age 55.
On a different topic, now that the UK Lifetime Allowance has decreased to £1m in 2016/17, there has been an upswing in people using a QROPS to limit tax bracket creep of excess entitlements. A transfer of a UK pension benefit to a QROPS is a Benefit Crystallisation Event. The LTA will (after a couple of years’ freeze) increase at CPI. The account balance is likely to grow faster resulting in an ever-increasing excess highly taxed component.
Finally the factors used to calculate minimum and maximum pension drawdowns (GAD Factors) have been changed. Current drawdowns need to meet both UK and Australian requirements.
NetActuary will keep you posted of any legislation implementation changes that occur.