QROPS were established under regulations by UK HMRC in 2006 (so called Pensions A-Day) to allow people who are leaving the UK to take their pensions savings with them. These arrangements have become popular with UK ex-pats, primarily because of their simplicity and the increased investment flexibility they can provide. In addition, the ability to retain benefits, the removal of a requirement to buy an annuity contract, which can be expensive and restrictive, plus the freedom from Inheritance Tax – allowing you to pass your entire remaining pension to your dependents. That being said, there has been mixed publicity for QROPS following HMRC’s removal of Singapore QROPS from their list of authorised schemes. In practice this has meant that HMRC has tightened up its rules to prevent schemes from promising pension-busting solutions. However, in practice, this should be seen as a positive move, with the majority of providers, including ourselves, choosing to operate from better regulated locations.

It is important to note that if a scheme is deemed to have broken HMRC rules then any transfer made to that scheme could give rise to an unauthorised payment charge. This could be expensive, and has caused much concern amongst those advisors who have, or who are considering, a QROPS. After all, an unauthorised payment charge is likely to wipe out 55% of your pension savings. At St. James’s Place we have chosen to work with Close Brothers, who operate from Guernsey, which is itself renowned as a mature well-established international financial services centre and has been providing fiduciary services over 40 years for the provision of trusts, corporate services and, more recently, QROPS. Given any potential imposition of an unauthorised payment charge, the Close Brothers scheme run out of Guernsey ensures that any pensions savings transferred to a QROPS stays firmly within the rules, which can be summarised as:

• 75% of the fund value must be retained to provide retirement income

• Benefits must not be able to be drawn before age 55

• A properly valued drawdown, must be taken with no requirement to buy an annuity, and

• There must be adherence to the investment restrictions set out in Guernsey’s published Notes on Retirement Trusts.

Transfers can be made to a QROPS from most UK pension schemes, including personal pensions, self-invested personal pensions and small self-administered schemes. It is important to note that there is an obligation upon the trustees of the QROPS within 5 years of the member becoming non-resident to report to HMRC, details of all payments to beneficiaries. However, this requirement ceases once this time period has expired.

The principal advantages of transferring a UK pension to a Guernsey-based QROPS are:

• No requirement to purchase an insurance-based annuity

• Unlike benefits paid from a UK pension scheme, benefits from a Guernsey pension scheme can be paid without deduction of tax (although tax may apply in the member’s new country of residence), for Spain see below

• On death before age 75 any crystallised element of a UK pension scheme will be subject to a 35% Income Tax charge. No such charge applies under Guernsey pension legislation, so provided a member has been non-UK resident for 5 or more tax years these charges will not apply

• There is greater flexibility regarding the method and level of benefit payments, particularly once the member has been non-resident for more than 5 years

• Guernsey QROPS also allow for a wide range of investments including cash, fixed interest, equities, investment funds, hedge funds, life assurance, structured products and even real estate.

• Income can be drawn in a currency other than Sterling, ie Euros.

Not for everyone

While there are many jurisdictions where the ability to export a UK pension will be affective, not all jurisdictions will be favourable. This may be because there is no recognition of pension schemes or trusts in the country to which an individual has moved, or there is general uncertainty as to how such arrangements will be treated for both local income, capital gains and estate duty purposes. Other issues to be aware of include:

• The charging structure quoted by your chosen trustees and/or advisor. You should ensure all fees are quoted on a transparent basis, preferably a fixed fee rather than a percentage of the fund

• Although rare, you should also remember that when a pension fund transfers to a QROPS, some of the tax benefits may be lost. For example, if commercial properties are held, and generate an income, these will be received gross within a UK pension scheme. Within a QROPS however, they will be liable to Withholding Tax, which from April 2010, has been 50%.

QROPS are not for everyone, but for those who intend to leave the UK for good a transfer of their pension to a properly run QROPS with reasonable fees offers a good degree of additional flexibility, provided you understand how the benefits will be received in your chosen location.

QROPS and Spain

Provided you are already resident in Spain, or it is your intention to move to Spain within the next twelve months, there are no significant issues to be aware of except those relating to the selection of an appropriate retirement age (see below). Although twelve months is not a statutory requirement there seems little point in incurring trustee fees within the QROPS until such time you are ready to take the benefits of non-UK residency. In other words, there are no differences from a Spanish perspective at the point of transfer into a QROPS from the position in the UK.

While it is possible for an individual to transfer his or her UK pension into a Spanish qualified pension plan it would not improve the tax position when compared to a transfer to a QROPS and, from a practical point of view, there may be issues relating to language, interpretation and investment flexibility that may make this inadvisable.

Tax Implications of QROPS prior to drawing Benefits

Tax benefits on pension saving vehicles are only available to Spanish qualified pension plans or European qualified pension plans. In order to qualify it is necessary to comply with a very restrictive and a government-controlled legal framework. A QROPS based out of Guernsey (indeed anywhere other than Spain) would not qualify for such treatment. That being said, it is important to note that having a qualified pension does not improve the tax position for the member compared to a QROPS, as the tax benefits are solely focused on contributions and not distributions. In other words, the tax treatment for benefits and payments received from qualifying plans are the same as those from non-qualifying plans.

It is, however, important that the QROPS is deemed to be “an employment related pension plan” and not a personal scheme for individual savings. This is necessary in order to avoid the application of Spanish anti-avoidance provisions. An employment-related plan needs to be related to the employment of the member, but does include plans where you have made the contributions from employment or self-employment income. On this basis QROPS will be non-qualified employment-related plans in the vast majority of cases.

Selected Retirement Age

Provided the member and beneficiaries do not have the right to receive benefits from a QROPS until relevant events occur, ie retirement and/or death, a member will not be subject to Spanish tax on the simple existence of a QROPS. However, once the beneficiary is entitled, ie he or she reaches retirement age, the member could become immediately liable to tax in Spain regardless of whether benefits are received or not. It is essential, therefore, that you either select a retirement age at which you will begin to take distributions, or defer the retirement age to as late as possible, on the basis that benefits could be taken before the selected retirement age without adverse tax issues in Spain.

Taxation and Income Benefits

Benefits from a pension scheme (qualified or not) are treated for Spanish tax purposes as employment-related income and as such income, either drawdown or received as an annuity, are subject to Spanish income tax (general base) on the entire amount at the rates and levels applicable in the fiscal year of receipt.

While there are no additional Spanish tax restrictions to the income benefits available from a QROPS to those that already exist within Guernsey QROP legislation, it is important to note that withdrawal of the tax free lump sum from the QROPS will be treated no differently from that of any other withdrawal; that is to say, it will be fully assessable to Spanish income tax, as any other distribution. On this basis, ideally you would withdraw your tax free lump sum prior to establishing tax residency in Spain.

Spanish Inheritance Tax and Forced Heirship

Finally, benefits from a QROPS are not subject to the equivalent of Spanish Inheritance Tax and are also not subject to Spanish forced heirship limitations or succession law in general.