IN214 - The Celestial Retirement Annuity Trust Scheme - Tax Free UK Pensions

New UK Pension Rules were introduced by the UK tax authorities on 6th April 2006, generally known as “A Day”, and it is since this date that the concept of Qualifying Recognised Overseas Pension Schemes (QROPS) was introduced. The intention was to simplify the procedures for individuals leaving the UK to transfer their pension funds with them.

The pension transfer does not have to be to the same jurisdiction that the individual lives in or is moving to, outside of the UK.

This transfer is available whether the individual has retired or not.

Dixcart has established the Celestial Retirement Annuity Trust Scheme in Guernsey, to undertake the administration of Guernsey QROPS.

What is defined as being QROPS status?

For a pension scheme outside the UK to accept the transfer of a UK pension, it must firstly meet specified conditions to be classified as a “Qualifying Recognised Overseas Pension Scheme”. The detailed rules are beyond the scope of this note, but are contained in the following UK legislation:

• Finance Act 2004, Section 150
• Statutory Instrument 206 of 2006

Once an overseas pension scheme complies with these rules it can apply to the UK tax authorities to obtain qualifying status, to be recognised as a QROPS.

Who can Benefit from a Transfer of their Pension Fund to a QROPS?

The benefits of transferring a pension to a QROPS are available to:

• Individuals who are planning to leave the UK in the near future
• Individuals who have already left the UK

QROPS status is essential as a transfer from a UK scheme to an overseas non-qualifying scheme is subject to UK Income Tax at 40%, a figure which with surcharges can increase to 55%.

What Types of Pension Fund Cannot be Transferred?

The majority of UK pension funds can be transferred into a QROPS, with the exception of:

• The State Pension.
• Benefits from within some UK group pension schemes (this should be checked with the pension provider).

Additional Security Provided by a Guernsey QROPS

Guernsey introduced flexible legislation covering the provision of personal pension arrangements during the 1990s. It was a logical step that the Retirement Annuity Trust Schemes and, in particular, the Multi Member Schemes should be extended to comply with the rules introduced on 6th April 2006. Guernsey therefore obtained QROPS status from the UK tax authorities to allow for the administration of pension arrangements transferred from the UK to Guernsey.

The Guernsey tax authorities have worked very closely with the UK tax authorities to ensure that Guernsey complies, not only with the rules of the UK QROPS legislation, but also with the spirit of the legislation.

The tax authorities in Guernsey liaise closely with practitioners on the Island to guarantee that the detail of the QROPS legislation is being followed.

Some other jurisdictions have not been as diligent as Guernsey and, where pension providers have breached the regulations, their QROPS status has been terminated by the UK tax authorities. This has left clients with large tax bills and a pension mess to resolve.

The Advantages of a Guernsey QROPS such as Celestial

In general terms the advantages of a pension scheme being transferred out of the UK into a QROPS include greater flexibility and potential tax benefits. Specific advantages include the following:

• The majority of UK schemes require members to purchase an insurance based annuity before they reach the age of 75. On death the insurance company will retain the majority of the residual assets.
  
  Under Guernsey legislation, benefits must still be taken by the age of 75, but there is no requirement to purchase an annuity from a ‘life company’. A regular income must be paid to each particular individual, but this does not have to be achieved through the majority of the funds being used to purchase an annuity from an external source.
  
  This preserves the value of the fund for future generations, which can then be passed on without any liability to inheritance tax.
  
  
• The benefits from a Guernsey scheme can be paid gross to all persons who are not Guernsey resident, without deduction of Guernsey income tax.
  
  
• No Guernsey income tax or capital gains tax are payable on the assets within the scheme.
  
  
• Transfers into a QROPS are not regarded as “transfers of value” for inheritance tax purposes. They are also not subject to periodic or exit charges.
  
  
• A Guernsey scheme is able to invest in a wider range of investments, such as property, than is generally available under UK pension legislation.
  
  
• A Guernsey scheme is able to invest in currencies other than sterling. It may be particularly useful to be able to invest an individual’s pension fund in the currency where they are resident. This is also likely to be the currency in which their liabilities are denominated.
  
  
• There is greater flexibility in the payment of pension benefits. Currently the maximum lump sum payment on retirement is 25% of the fund, although this is due to be increased to 30% in the near future in Guernsey.
  
  
• The rules in Guernsey are not as regimented as the UK and allow the trustees of the pension fund to act in the best interests of each client, depending on their specific circumstances.

Tax Position

The QROPS provider has to report to the UK tax authorities for a five year period after the individual has left the UK. During this period the scheme must be administered in accordance with UK pension rules. After the five year period of residency outside the UK, the scheme must continue to comply with Guernsey pension rules. As previously stated these are more attractive than UK rules, particularly as there is no requirement to purchase an annuity.

It should be noted that any UK source income, such as bank interest or rental income, may still be liable to UK taxation, and the trustee will need to complete the relevant self assessment forms with respect to this income.

Pension Advice

Any decision as to whether to transfer a pension entitlement into a QROPS must be taken in conjunction with an individual’s pension fund advisers. Dixcart does not give advice on UK pension matters.

Administration

Once a pension fund had been transferred to Guernsey, Dixcart is able to provide all relevant administration services through The Celestial Retirement Annuity Trust Scheme.

Additional Information

For additional information about Celestial please contact Alasdair Milroy in the Guernsey Office: alasdair.milroy@dixcart.co.gg or contact us.