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Could QROPS rules changes benefit SIPPs?

5 April 2017

Nigel Bennett, sales & marketing Director, InvestAcc has a view.

The surprise announcement in the Spring Budget surrounding Qualifying Recognised Overseas Pension Schemes (QROPS) has led to many predicting the demise of the overseas pension transfer. This was somewhat of a knee jerk view as there will still be a market for QROPS transfers although SIPPs may become more popular for those seeking advice before they leave the UK.

Early QROPS

The intention of the original legislation for QROPS was to recognise the emergence of the global economy with a more mobile workforce, where individuals may choose to live and work in a number of different countries.

In the early days of QROPS there were many stories about people abusing the system, transferring their pensions overseas, in some cases while they physically remained in the UK. One example of marketing materials that didn’t do the early QROPS market many favours, went along the lines ‘board a plane to X country, leave the airport and check into a hotel, the next morning complete some forms to transfer your UK pension and then jump back on the next flight to the UK’. Whilst this is perhaps one of the most audacious examples, it is fair to say that overseas transfers have often been associated with high charges and in some cases very little in the way of investor protection, in particular from unscrupulous scammers.

Many early transfers were driven by a desire to avoid the Lifetime Allowance, although a transfer to QROPS is in itself a benefit crystallisation event (BCE) and would therefore be tested against the Lifetime Allowance, or to take advantage of the rule that restricted benefits to something similar to the UK system only for the first five years, which may have looked attractive compared to the options available in the UK at the time; the 2015 Freedom and Choice reforms have of course swept away most ‘restrictions’.

The modern day QROPS market

QROPS transfers are a legitimate option for those who have accrued some UK pensions and wish to draw them whilst abroad. Typically we are talking about Brits retiring abroad, or foreign nationals who spend time working in the UK accruing pension benefits and who then either return to their country of domicile or move to another country.

Clearly these individuals will require advice from someone who is familiar with the tax and legislative environments in both the UK and the country in which the pension scheme is based, and possibly even a third country if the individual lives elsewhere; these are undeniably complex areas and it can be difficult to know who has the required expertise and indeed regulatory permissions.

Whilst some people may benefit from a transfer to QROPS, any type of transfer will have advantages and disadvantages, care must be taken to weigh the relative importance of each one, remembering that many people who ‘retire’ abroad with no intention of returning often do move back to the UK for various reasons such as where a spouse has pre-deceased them, or due to ill health.

Will SIPPs benefit?

As a result of the Spring Budget changes unveiled by Chancellor Philip Hammond, it is likely that fewer people will now transfer their pension benefits abroad. For those that choose to leave their pension benefits behind in the UK, there may be reasons to consider a move to a SIPP while they are still UK resident, as afterwards they may find it difficult to find a pension scheme and/or adviser who is willing or able to establish a SIPP for a non-UK customer. This is because few UK advisers will have the regulatory permissions to provide advice to non-UK customers and SIPP operators will generally not have sought the equivalent permissions to establish schemes for non-UK customers. Having an open-market SIPP in place before leaving the UK could be beneficial, as this should allow the widest range of options without the need to transfer between pension schemes, should the investments perform poorly.

Perhaps the greatest issue is whether the client can continue to receive quality regulated advice once they have left the UK; most SIPP operators will only recognise a UK-based FCA regulated adviser and this may lead some to leave the investments alone, to ‘self-direct’ or to seek out a UK adviser that can deal across borders.

The Spring Budget changes will result in fewer QROPS transfers, but they won’t reduce the number of people that leave the UK, so the need for advice will remain strong. Many customers will prefer to deal with a UK-based firm operating in one of the world’s most regulated markets, and all that entails. Let’s hope that individuals moving abroad speak to their UK-based adviser before boarding the plane, that conversation could be much more important than they realise.

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