The QROPS offshore pension five year rule is at the root of concerns over HM Revenue and Customs pulling the mat from under providers suspected of breaking complicated tax rules.
The issue is not really the rule – it’s quite straightforward – but the way some advisers and providers are selling products to unwitting retirement savers as tax solutions.
To understand the five year rule, an understanding of why a QROPS is available at all is required.
QROPS offshore pensions cam in to being on April 6, 2006 as a method of porting pension savings between financial jurisdictions for ease of access by ex pats.
The five year rule comes in here – for the first five years an ex pat is abroad, the QROPS provider has to report any unauthorised withdrawal to HMRC.
An unauthorised withdrawal is taking funds or benefits from a pension before the age of 55 years old at the earliest.
The reason for this is an ex pat is not considered a non-UK national until stacking up an absence of at least five clear tax years from Britain. During that time, any QROPS pension follows UK pension rules – but after the five years, the ex pat is deemed to have left the UK permanently and any pension income is considered taxed in his or her new country of residence.
Because HMRC no longer has a tax interest in the QROPS and the pension investor has no call on state benefits if they spend their fund, what happens next is of no concern of HMRC.
The big problem for QROPS investors is drawing down funds in the five year period. All HMRC action against QROPS providers and jurisdictions to date has related to breaching drawdown regulations governed by the five year rule.
The providers and jurisdictions at risk of losing QROPS status are those that let pension investors access funds in contravention of the five year rule. If the five year rule is broken, both the provider and the investor face fines of at least 55% of the transfer fund value in to the QROPS scheme.
The lesson for QROPS pension investors is really sit tight for five years and become an official ex pat before tempting fate and making an unauthorised withdrawal.