Taxation of Pensions Bill

Written evidence submitted by Stephen Ward (TP 04)

1. About this submission

1.1. This submission is made by Stephen Ward who has been a pensions practitioner since the 1970´s and who specialises in matters relating to overseas pension schemes and their interaction with UK pension schemes.

1.2. Stephen Ward is the author of Tolley´s Pensions Taxation 2014-15.

1.3. This submission is confined to a consideration of the need to amend the definition of a Recognised Overseas Pension (ROPS) to enable those with UK tax relieved pension funds which have been transferred to a Qualifying Recognised Overseas Pension (QROPS) to benefit from the same flexible benefits regime (where local legislation permits) as will apply to members of UK defined contribution pension schemes from April 2015 following the passage of the Taxation of Pensions Bill 2014-15.

1.4. In summary this submission sets out the two places in current legislation where that legislation prevents those who transfer to a QROPS benefiting from a flexible benefits regime.

2. Introduction

2.1. A pension transfer is the movement of an individual's accrued pension rights from one pension scheme to another. UK tax legislation specifies which transfers may be made without adverse tax consequences. These transfers are known as "recognised transfers" (Finance Act 2004 s169), and are a type of authorised member payment. The term "authorised member payment" means that this is a type of transaction that can be made without any tax implications on the member or on the transferring scheme.

2.2. To be an authorised member payment such transfers must be made to either a UK registered pension scheme or to an overseas pension scheme which is recognised by HMRC as a Qualifying Recognised Overseas Pension Scheme (QROPS).

2.3 Under FA 2004 s 150(8) a Recognised Overseas Pension Scheme (ROPS) is an overseas pension scheme that meets the requirements prescribed under The Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) Regulations, (SI 2006/206 as amended by SI 2012/884).

2.4 A QROPS is a ROPS which makes certain undertakings to HMRC. This includes an undertaking to comply with prescribed information requirements to be found in The Pension Schemes (Information Requirements – Qualifying Overseas Pension Schemes, Qualifying Recognised Overseas Pension Schemes and Corresponding Relief) Regulations, (SI 2006/208, as amended).

2.5 This submission considers the current position as it relates to, and is now inconsistent with, the UK position applicable from April 2015 under the Taxation of Pensions Bill 2014-15.

3. What makes an Overseas Pension Scheme a ROPS and Taxation of Pensions Bill 2014-15 considerations

3.1. There are three tests that an overseas pension scheme must satisfy in order to be a ROPS. (SI 2006/206 as amended by SI 2012/884).

It must be:

· A pension scheme then

· An overseas pension scheme then

· A recognised overseas pension scheme.

3.2. A pension scheme

A scheme designed to provide benefits in respect of retirement, ill-health, death or similar circumstances.

3.3. An overseas pension scheme

For a scheme to be classed as an overseas pension scheme under Section 150(7) Finance Act 2004, it must be a pension scheme that is established outside the United Kingdom. Normally a pension scheme will be treated as established in the country where its registered office and main administration is. In addition the overseas pension scheme must meet the requirements set out in SI 2006/206 as amended by SI 2012/884.

The overseas pension scheme must meet the "regulation requirements’ test" and the "tax recognition test".

3.3.1 The ‘Regulation Requirements test’

The regulation requirements test is met if one of the following three requirements is satisfied:

Requirement (a)

(1) The scheme is an occupational pension scheme,

(2) There is in the country or territory in which it is established a body which regulates occupational pension schemes and

(3) The scheme is regulated by that body.

or

Requirement (b)

(1) The scheme is not an occupational pension scheme

(2) There is in the country or territory in which it is established a body which regulates pension schemes other than occupational pension schemes and

(3) It is regulated by that body

or

Requirement (c)

Neither requirement (a) or (b) is met by reason only that no pensions regulatory body exists in the country or territory and, either,

(1) The scheme is established in a Member State of the European Union or in Norway, Iceland or Liechtenstein, or

(2) The scheme’s rules provide that at least 70% of a member’s UK tax-relieved scheme funds will be designated by the scheme manager for the purpose of providing the member with an income for life. The pension benefits payable to the member (and any associated lump sum) must be payable no earlier than age 55 other than in ill health.

Submission 1.

We submit that requirement (c) (2) should be amended so that the "70% rule" be deleted so that this requirement only states that, "The pension benefits payable to the member (and any associated lump sum) must be payable no earlier than age 55 other than in ill health."

This amendment enables an overseas pension scheme to offer flexi access drawdown and uncrystallised funds pension lump sums so long as local legislation permits.

To be consistent with UK legislation the "no earlier than age 55..." provision should be introduced into requirements (a) and (b).

3.3.2. The ‘Tax Recognition’ Requirement

The pension scheme needs to be ‘recognised for tax purposes’ under the tax legislation of the country or territory in which it is established. This requirement is met if all the of following 3 conditions are met:

Condition 1

The scheme must be open to persons resident in the country or territory in which it is established.

Condition 2

The scheme is established in a country or territory where there is a system of taxation of personal income under which tax relief is available in respect of pensions, and one of tests (a), (b) or (c) is met.

(a) Tax relief is not available to the member on contributions made to the scheme by that individual or, if the individual is an employee, by their employer in respect of earnings to which benefits under the scheme relate,

or

(b) The scheme is liable to taxation on its income and gains, and is a complying superannuation plan as defined in section 995-1 (definitions) of the Income Tax Assessment Act 1997 of Australia,

or

(c) All or most of the benefits paid by the scheme to members who are not in serious ill-health are subject to taxation.

or

Condition 3

The scheme is approved or recognised by, or registered with, the relevant tax authorities as a pension scheme in the country or territory in which it is established.

3.4. A Recognised overseas pension scheme (ROPS)

Under section 150(8) Finance Act 2004 a ROPS is an overseas pension scheme that meets the following requirements prescribed under SI 2006 206 as amended:

It must satisfy:

1. The benefits exemption test,

and

2. One of conditions (a), (b), (c) or (d).

3.4.1 The benefits exemption test

Where an exemption from tax in respect of benefits paid from the overseas pension scheme is available to members of the scheme who are not resident in the country or territory in which the scheme is established, the exemption must,

(i) Also be available to members of the scheme who are resident in the country or territory; and

(ii) Apply regardless of whether the member was resident in the country or territory, when the member joined the scheme; or for any period of time when they were a member of the scheme.

If there is no exemption from tax available to members who are not residents in the country or territory where the scheme is established then the benefits exemption test will be met.

3.4.2 The Conditions

The overseas pension scheme must:

(a) Be established in a Member State of the European Union, Norway, Liechtenstein or Iceland, or

(b) Be established in a country or territory, other than New Zealand, with which the UK has a Double Taxation Agreement that contains exchange of information and non-discrimination provisions, or

(c) Satisfy the requirement that, at the time of the recognised transfer, the rules of the scheme provide that:

(i) At least 70% of the funds transferred will be designated by the scheme manager for the purpose of providing the member with an income for life,

(ii) The pension benefits (and any associated lump sum) payable to the member under the scheme, to the extent that they relate to the transfer, are payable no earlier than age 55.

(iii) Membership of the scheme is open to persons resident in the country or territory in which it is established,

or

(d) Satisfy the requirement that, at the time of the recognised transfer the transfer is made to a pension scheme which is a KiwiSaver scheme as defined in section 4(1)(interpretation) of the KiwiSaver Act 2006 of New Zealand.

Submission 2

We submit that requirement (c) (i) "the 70% rule" should be removed.

This amendment then enables an overseas pension scheme to offer flexi access drawdown and uncrystallised funds pension lump sums so long as local legislation permits.)

The "other than New Zealand" provision in (b) becomes redundant.

And arguably (d) also becomes redundant.

November 2014

Prepared 12th November 2014