Non-EEA residents
For those people who have a UK pension and are resident outside of the EEA, the OTC
will be applied unless the Qrops and member are in the same country or territory, for example Australia, or where the transfer is being made to an overseas occupational
type arrangement.
This brings into question whether the OTC has been applied fairly and consistently. The reason it has been applied is primarily to target those who are using Qrops to avoid paying income tax.
However, the UK’s Treasury has taken a very broad brush approach and the charge is impacting many people who are not trying to avoid tax.
It would be legitimate to ask why an expatriate living in Europe does not have to pay the OTC, but an expatriate living in Asia does. Certain expatriate groups in non-EEA countries have lobbied the government on this point.
There will be many circumstances where Qrops in Australia will be used (there are about 1.2 million British expats living there) and the OTC will not apply in these cases because the member is living in the same country as the pension scheme is established in.
See case study 3 below:
Case study 3
Robert has a number of UK pensions. He currently lives and works in Australia and intends to retire there.
Robert’s adviser recommends that he considers transferring his UK pensions into an Australian pension that has a Qrops certificate.
Robert will not have to pay an overseas transfer charge as he will be transferring to a Qrops that is in the same country in which he
is resident.
There is a limited market for more ‘same country’ Qrops to be developed in countries such as New Zealand, Isle of Man, Guernsey, Jersey, Ireland, Hong Kong, Switzerland, and South Africa, which already have schemes on the HMRC list.
Trustees of schemes in these countries, along with all other Qrops trustees needed to confirm to HMRC by 13 April 2017 that they wished to remain on the Qrops list and are able to administer the OTC.
This would allow residents of these countries to transfer to a Qrops in appropriate circumstances without an overseas transfer charge being applied.
In other areas, there will still be clients who have UK pensions and require advice. Sipps will become the most regularly used solution for non-EEA resident clients.
Qrops had previously been oversold by some advisers and also sold when a UK Sipp would have been a more appropriate solution. An example of this might have been when a client was working overseas on a short-term employment contract but intended to return to the UK at some point.
Going forward, advisers who have been giving their clients holistic, appropriate advice will win over those advisers who have been selling Qrops as a default solution for a non-UK resident client with a UK pension.
Other pensions planning solutions, such as overseas annuities and qualifying non-UK pension schemes, should be considered in appropriate circumstances.
Unintended consequences
One unintended consequence of the increased use of UK Sipps will be that underlying investments will have to be selected more carefully than has often been in
the past.
UK Sipp managers will not have a problem with the use of offshore bonds but they will wish to see commission being disclosed and will need to be satisfied that the underlying investments selected are appropriate to the clients’ circumstances.
Flexible drawdown
One other reason for using Qrops for residents of non-EEA countries may be when full flexible drawdown is required and the client wishes to withdraw the whole fund.
Since the introduction of flexible drawdown in the UK many more people have withdrawn their full pension than was originally anticipated.
There is an ‘under the mattress’ mentality whereby because individuals are able to withdraw their full pension they will. This may not be the best thing for them to do and in some cases is likely to occur when the client has not been advised.
If an adviser does have a client who insists upon flexible drawdown there can be planning opportunities, the client suddenly has a very large sum within their estate which generates a potential inheritance tax liability and these funds require investing.
