Pensions Alert: Budget 2017 - Transfers to overseas pension schemes

Pensions Alert (UK)

Whilst there were not a significant number of pensions announcements in this week's Budget, an announcement about the introduction of a new tax charge that will apply to certain transfers to Qualifying Recognised Overseas Pension Schemes (QROPS) will require action by trustees of UK occupational pension schemes. In this Pensions Alert we provide a brief overview of the new tax charge (the overseas transfer charge) and action points for trustees to consider.

Background

Prior to the changes announced this week, transfers could be made from registered pension schemes to QROPS free of tax (up to the lifetime allowance). However, in light of concern about use of the QROPS regime as a way of gaining an unfair tax advantage, the government is introducing a 25% tax charge on transfers to QROPS targeted at those seeking to reduce the tax payable by moving their pension savings to another jurisdiction.

The legislation to give effect to the changes is currently in draft form and will be included in the Finance Bill 2017. HMRC has also published draft guidance in relation to the changes.

An overview of the overseas transfer charge

The overseas transfer charge is relevant to recognised transfers to QROPS that were requested on or after 9 March 2017. HMRC's draft guidance states that a transfer request is made when a member has made a substantive request to the scheme administrator on which the administrator is required to take action.

In summary, the overseas transfer charge of 25% will apply to transfers to QROPS requested on or after 9 March 2017 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, or the QROPS is provided by the individual's employer.

The overseas transfer charge will also apply if the member has not provided the scheme administrator with specified information before the transfer is made.

When the overseas transfer charge arises on a transfer from a registered pension scheme, it is the joint and several liability of the member and the scheme administrator (usually the trustees).

The overseas transfer charge will also apply in certain circumstances when an onward transfer is made from a QROPS to another QROPS.

There is also provision so that if certain circumstances change within the five full tax years following a transfer, a payment that was tax-free may become chargeable or if it was chargeable, it may be possible to claim a repayment.

The status of existing QROPS

Managers of schemes that were QROPS on 8 March 2017 will have to submit a revised undertaking to HMRC by 13 April 2017 confirming that they will operate the overseas transfer charge. If this undertaking is not submitted, the scheme will automatically stop being a QROPS from 14 April 2017. From 9 March 2017 the undertakings given to HMRC by the manager of a scheme that is not yet a QROPS must also cover this point.

HMRC will be suspending its Recognised Overseas Pension Schemes notifications list on 14 April and a revised list will be published on 18 April 2017.

Action points for trustees of UK schemes

In light of the requirement for existing QROPS to submit an undertaking by 13 April or stop being a QROPS, schemes should check that receiving schemes have submitted the relevant undertaking. This check will be needed for any transfers after 13 April irrespective of the date that the transfer request was made. If the transfer is made and the scheme has not submitted the undertaking and is no longer a QROPS, it will be an unauthorised payment.

For requests made on or after 9 March 2017, trustees of registered pension schemes will need to review their processes for dealing with transfers to QROPS and update them as necessary. Points that will need to be covered in the updated process include the following.

  • When a request is made for a transfer to a QROPS, schemes must let the member know that they will need to provide specified information to the scheme before the transfer can be made
  • Schemes will need to assess whether the overseas transfer charge will apply
  • If the overseas transfer charge applies, schemes will have to deduct the tax due before making the transfer. Schemes will also have to report and pay the tax to HMRC using the Accounting for Tax return process
  • Following the transfer, the scheme will have to provide specified information to the member, the QROPS to which the transfer was made and HMRC. It is important to note that there are requirements to provide information even if the overseas transfer charge does not apply

Schemes dealing with transfers to QROPS should consider seeking detailed advice about the steps that they will need to take in light of the changes announced this week.

Further changes in relation to overseas schemes

It is also worth noting that in December 2016 HMRC published draft regulations for consultation proposing changes to the conditions to be an 'overseas pension scheme' and a 'recognised overseas pension scheme'. These changes are relevant to the question of whether a scheme meets the criteria to be a QROPS. If enacted, these changes also have implications for processes for overseas transfers. We will provide a further update on these changes once the relevant regulations have been finalised.

If you would like further information about the issues raised in this Pensions Alert and the implications for your scheme, please get in touch with your usual DLA Piper pensions contact.