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The UK's pension transfer market for HNW individuals – a City grandee explains the rules

From now on, only advisors regulated by the Financial Conduct Authority will be able to offer advice on the transfer of defined benefit pension schemes into Qualifying Recognised Overseas Pension Schemes (QROPS). Compliance Matters interviews the head of deVere Group about why he thinks that this is a good thing.
The new, tougher
regulations and guidelines announced yesterday for the United
Kingdom’s pension transfer market have come in for much
approbation
from Nigel Green, the founder of the global pension transfer firm
of
deVere Group. From now on, only advisors regulated by the
Financial
Conduct Authority will be able to offer advice on the transfer
of
defined benefit pension schemes into Qualifying Recognised
Overseas
Pension Schemes (QROPS).
The
'professionalisation' of advice
A recent review that
the FCA commissioned, which took in nearly 300 cases from
bulk
pension transfer advice exercises between 2008 and 2012,
unearthed “a
risk of customers losing out on retirement income due to poor
advice.” Green, who answered Compliance Matters' questions by
email, agreed with it on the grounds that the concept of
“professionalism” must continue to gain ground in the sector.
“We champion the
revised QROPS guidelines that insist that a client’s tax
position
and risk appetite, amongst other factors, are fully assessed;
and
that schemes that are substantially underfunded will have the
right
to refuse transfers. The clampdown will, without doubt,
strengthen
the sector for all its concerned,” he said. His answers to
our
questions are below.
Q1. What's the
angle here for high-net-worth (HNW) clients?
A: HNW clients are,
typically, financially 'savvy' individuals who are aware of the
need
for tax efficiency – perhaps largely because their tax burden
could
be extremely high – and investment flexibility and control in
order
to achieve their long-term financial goals. Therefore, if
they
reside overseas, or are planning to move out of Britain, it
often
makes sense for them to consider QROPS as part of their
personal
finance strategy. Whether QROPS are an option or not will,
ultimately, depend on where they want to retire.
Q2. Who organises
QROPS for HNWs?
A: It is highly
recommended that an independent financial advisor with
cross-border
expertise and QROPS experience should organise pension transfers.
Since the Treasury
announcement this week, only FCA-licensed advisors will be able
to
give advice about the transfer of British pensions to other
jurisdictions. To my mind, this makes perfect sense.
This will clearly
result in more compliance procedures for firms such as deVere
Group,
which offers QROPS and has an FCA licence in the UK, but I
believe
that it will inevitably drive up the quality of advice,
improve
standards in the wider financial services industry, protect
clients
more effectively from sharp practice, make advisors more
accountable,
and mature the sector further.
Q3. What did
George Osborne, the Chancellor of the Exchequer in the UK, do
to
promote QROPS recently?
A: It is not quite
‘promotion,’ but rather that the FCA, amongst others, has
been
working diligently to shore up the industry by making up
tougher
rules and regulations and scrutinising more schemes, as well as
the
firms that promote them. This is something we support as it is
of
benefit to all stakeholders, including the clients and advisers,
as
it is bound to make the sector grow in the long term.
Q4. How many
schemes are there? Are any coming off the list and, if so, where
and
why? Is the list still growing?
A: The number of
QROPS has hit yet another new high with 3,416 on the latest
HMRC
list. The number of pensions tops the previous high of 3,405
QROPS
listed on 1st June 2014. There are 42 financial jurisdictions
currently represented. This list seems likely to grow longer as
the
industry becomes more robust and demand for QROPS continues to
soar
as more clients become aware of their associated benefits. On
the
latest list, two schemes were removed – one in South Africa and
one
in Trinidad and Tobago.
Q5. How old is
the concept of QROPS?
A: HMRC established
the concept of QROPS in April 2006.
Q6. What hoops
does one have to jump through to get HMRC to say 'yes' to a
QROPS? Is
there leeway?
A: Each scheme into
which we transfer a pension has to be recognised by HMRC. There
is a
specific, and increasingly stringent, set of criteria for
every
scheme to adhere to, should it wish to become an
HMRC-recognised
QROPS.
Q7. 200 schemes
migrated from Guernsey to Malta in 2012. What happened
there?
A: In 2012, HMRC
guidance notes banned jurisdictions, including Guernsey, from
changing local laws to allow residents to be taxed differently
from
non-residents.
Q8. Is there
anything else to say about the offshore angle to the
phenomenon?
A: It is a
phenomenon that is, without doubt, on an upward trend. This
is
largely because the world is becoming increasingly globalised. As
a
result, people are living, working and retiring abroad more
than
ever. Because of this, demand for pension transfers will continue
to
soar.
Editor's note: A
matter of faith
As with the US
Foreign Account Tax Compliance Act regime, the concept of
'good
faith' has crept into the QROPS regime. Scheme lawyers or
other
advisors must tell HMRC if their scheme no longer qualifies for
the
classification and sometimes they might hold on for too long
before
doing so. As long as they do so inadvertently, HMRC offers them
a
'safe harbour'. Its rules state: “Where the scheme
administrator
has relied on the fact that the overseas pension scheme is
included
on the latest published list (and can demonstrate if required
that it
checked the list no more than one day before the transfer was
made)
and did so in good faith, this should normally provide just
and
reasonable grounds for HMRC to discharge any liability of the
scheme
administrator to the scheme sanction charge.”
The FATCA 'good
faith' concept appeared recently and very quietly in a US
Treasury
side-note and, according to some, threatens to undermine the
entire
regime. Notice 2014-33 of 2nd May states that the Internal
Revenue
Service “will take into account” the extent to which certain
parties, such as foreign financial institutions and
withholding
agents, have made "good faith efforts" to comply with their
obligations. It does not attempt to define this phrase, which
it
later couches as "reasonable efforts." Neither does it
elaborate on the "relief from IRS enforcement during the
transition period" which it promises to such people. HMRC's
'good faith' clause is in the same vague vein, although its
QROPS
regime does not rely on the credibility of international threats
in
the same way that the FATCA regime does.