Guernsey as a Jurisdiction for QROPSDaryn Hutchinson
Regulations introduced as a result enable members of UK pensions schemes (including qualifying pension schemes which have received tax relieved contributions), who have left or intend to leave the UK to take up permanent residence in another country, to transfer their pension benefits either before, at or after retirement to a pension fund located outside of the UK, subject to the transferee pension scheme complying with certain requirements stipulated in the Regulations. Qualifying Recognised Overseas Pension Schemes (usually known simply as QROPS) is the name given to a pension scheme situated outside of the Untied Kingdom that has met the criteria laid down, has been registered with the HMRC and can therefore receive transfers from UK pension schemes.
Taking advantage of these provisions by transferring their benefits out of a UK scheme may give a member of a UK pension fund significant income tax and inheritance tax benefits due to the manner in which benefits can be taken at or after retirement. The rules are fairly onerous and revolve around the definition of tax residence in the UK. The tax benefits are most pronounced once a former UK resident, who has transferred pension benefits to a QROPS, is no longer considered tax resident in the UK (ie the person has lived outside of the UK for longer than five years). For example, if a member has transferred his pension benefits to a Guernsey QROPS, retires and then dies after the age of 75 and the remainder of the QROPS fund value accrues to his dependents, there will be no tax charge on receipt of those benefits by the member’s dependents. By contrast if the member is still considered tax resident in the UK at the time of death the cumulative tax charge on the remaining fund value can be as high as 82% of the fund value received by the dependents.
Guernsey is an ideal jurisdiction for creating a QROPS as it has a bespoke personal pension regime, known as Retirement Annuity Trusts (RATS), which are approved by Guernsey’s Director of Income Tax. The Guernsey RATS can meet the criteria for approval as a QROPS and be registered with HMRC as a QROPS. HMRC publishes a list of approved QROPS on its website.
The benefits of transferring a pension to a Guernsey RATS from a UK scheme if the member has left, or is about to leave, the UK are as follows:
- no Guernsey income or capital gains tax is levied on the Guernsey RATS meaning there is gross roll up in the RATS;
- lump sum drawdowns of up to 25% are permitted, tax free;
- Guernsey levies no income tax on pension income at or after retirement which is paid to non-Guernsey residents and the pension benefit will therefore be paid gross (the pension may be subject to tax in the country in which the member is resident);
- there is no requirement to buy a purchased annuity at retirement meaning there is flexibility as to how pension benefits are drawn down and should the member die, the balance of the funds in the RATS is available to the member’s dependants;
- there is the option of member-directed investment decisions regarding the assets in the RATS and a good degree of investment choice and freedom;
- there is no limit on the accumulated value of the RATS.
However, to further amplify the advantages of affecting such a transfer, it is useful to consider what will happen if the member leaves their pension in the UK scheme after they have retired to another country. Some or all of the following are likely to occur:
- if it is an occupational scheme the fund may be underwritten by the employer and could be subject to funding shortfalls and uncertainty of future benefit;
- the pension has to be taken in the form of an annuity by the age of 75, which may “die” with the member in the case of a purchased annuity, or leave the member’s dependents with a limited or restricted dependents’ annuity with no entitlement to the remaining fund value;
- the pension income may be subject to the basic rate of income tax in the UK which will be withheld at source.
ATC acts as Trustee to RATS already approved by the Director of Income Tax and registered as a QROPS by HMRC. It is therefore possible for a person who is a member of either a UK personal pension or occupational scheme, and who has left or is about to leave the UK, to simply apply to ATC to join the Guernsey Retirement Plan by completing an application form; ATC will then deal with the transfer of the pension benefits, discuss the preferred investment options with the member and pay benefits at retirement in a flexible manner. For further information please contact Daryn Hutchinson (firstname.lastname@example.org) in our Guernsey office.