European and African cities dominate the most expensive expatriate destinations. Luanda, Angola, is the top-ranked city. Another African city near the top was N'Djamena, Chad, ranked 4th. Expatriates living in these cities have high expenditures for appropriate accommodation, transportation and imported goods. Other African cities remain more affordable.
Moscow is second in the global rankings, also because of its high-demand rental market and expensive goods commonly purchased by expatriates. Three Swiss cities – Geneva, Zurich, and Bern – are also in the Top 10. Switzerland remains one of the costliest locations for expatriates despite decreasing or stable accommodation costs and a robust Swiss franc.
Overall, the cost of living in cities across parts of Europe has gone up mildly as a result of the slight strengthening of local currencies against the US dollar.
Keith Boughton, director, Equiniti Paymaster said: “Ten years ago the value of sterling was significantly higher than it is today, and those emigrating abroad for their retirement enjoyed considerable value from their pension.
Equiniti Paymaster currently administers the payroll and international payment of pensions for over 50,000 expatriate pensioners, many of whom it said are former public sector workers receiving an average pension of around £5,600 a year. The largest proportion of these 50,000 pensioners has retired to the Eurozone (12.45%) where someone who retired in 2003 will have seen the purchasing power of their pension fall by 22%. Someone with a £5,000 pension would bring in just under 7,300 euros ten years ago, while the same pension amount would now bring in only 5,692 euros.
Those who have seen the biggest fall in their income are expats who retired to Australia. Over the past ten years, and particularly in more recent years, the Australian dollar has strengthened, compounding the weakening of sterling over the same period. This has meant pensioners are 47% worse off now than ten years ago, with the average pension falling from A$13,625 to A$7,253.
The global average across the 15 countries surveyed showed the concerning statistic that retirement savings will run out just after the halfway point (56%). The UK pension shortfall was ranked behind Egypt (45%), France (47%), China (50%) and Taiwan (50%).
Another concerning trend was that nearly half of all respondents (48%) had never saved for retirement, peaking in higher income countries such as France (65%). This compares with 54% in the UK, 56% in Australia and 50% in Taiwan. To underline the urgency of the retirement provision situation, HSBC pointed to a further study in the UK which illustrated that by deferring savings by ten years from age 30 to age 40, private pension income for a median earning man expecting to retire in 2055 could drop 32%.
The number of requests fell from the last tax year (2010 to 2011), in which HMRC made 857 requests from overseas governments for tax information on individuals. However, Pinsent Masons said the 40% drop is likely to be because HMRC has already gathered the “low hanging fruit” and is now turning its attention to more complicated cases.
Phil Berwick a partner at the law firm said: “HMRC has begun investigations into thousands of individuals with overseas assets in the last few years, and will probably have picked off most of the low hanging fruit.”
“HMRC teams have built up a very extensive picture of the assets they think are undeclared, so they will now be able to adopt a targeted approach.”
The requests were made via double taxation agreements and, according to Pinsent Masons, HMRC has one of the world’s largest networks of double taxation agreements and tax information exchange agreements, having them with more than 100 other countries.
This network continues to expand and in 2012, the UK signed new agreements with a number of countries, including Barbados, Liberia, Brazil, and Grenada amongst others.Among those countries most frequently targeted by HMRC in 2011, were Australia (96 requests), Spain (49 ) and Ireland (38 requests).
HMRC has outlined a proposal to extend the time apportioned regime to UK onshore bond policies. Under the regime, when a policyholder moves offshore the bond does not attract tax during the period of time they are outside the UK.
This “time apportioned reduction” is then deducted from the taxable amount at the point when the policy reaches a taxable event, for example at surrender. In the proposal, HMRC states: “...It is not considered appropriate that reductions to gains for periods of residence outside the UK should be limited to policies issued by insurers outside the UK. It is therefore proposed to extend the rules...so that they apply to policies issued by UK insurers.”
The regime has long been seen as a staple attraction of using an offshore bond, but these new proposals would mean some policy holders may prefer to opt for an onshore policy,
The consultation, which runs until 5 November, is also seeking to amend how the reduction is calculated. Current rules mean that the reduction is applied to the entire amount at the chargeable event, regardless of when top-up premiums were paid – even if they were paid in the UK.
Mr Shanly, a Berkshire property developer who appeared on the Sunday Times’s most recent Rich List in April in 480th place – with a fortune estimated at around £157m – pleaded guilty at Wood Green Crown Court, the HMRC statement noted. It said Shanly had closed the account in question, which had been opened with money inherited from his mother, “in an attempt to avoid detection”.
According to the BBC, Shanly's solicitor said the money that was transferred in 2008 into the HSBC account in question had gone to a children's charity in Switzerland, not to his client personally. Shanly had previously failed to disclose this HSBC account during an earlier civil inquiry, where he was found to owe around £1.5m, HMRC said. Shanly’s back tax, fines and costs are almost double the £430,000 in inheritance tax he sought to avoid.
“This [the Swiss account] was discovered when information about UK taxpayers with HSBC bank accounts in Geneva was handed over to HMRC”, the HMRC statement went on. David Gauke, exchequer secretary to the Treasury, said Shanly’s case “proves that the Government will track down and take action against those who try to get out of paying the tax they owe”.
- FinanceSpain.com is currently working on a new affiliation with leading QROPS intermediaries and trustees in Malta.
157E is the name given to a new “one-size-fits-all” pensions regime passed weeks ago by Guernsey legislators in an effort to accommodate a key concern raised unexpectedly by HMRC in December over existing third-country QROPS schemes. The 157E scheme treats Guernsey residents and non-residents the same, with no Guernsey tax due on benefits paid. In the statement, Treasury and Resources Minister Deputy Charles Parkinson said that although Guernsey was "naturally disappointed" by HMRC's action, "“we are relieved that pension schemes which have already been established in Guernsey will be largely unaffected, except in respect of any further transfers of assets from UK pension funds into those schemes.
It was not immediately clear how, if at all, the setback for Guernsey’s QROPS industry may similarly affect other QROPS jurisdictions, such as New Zealand, that have large third-country QROPS industries. Some QROPS experts said they thought HMRC was responding to the fact that Guernsey had created new pension legislation specifically designed to accommodate UK pensions transferred to the island on behalf of individuals who had no intention of becoming Guernsey residents. They pointed to Clause 2.69 of Finance Bill 2013, which was published as part of the 2012 Budget and which stated that, any country or territory with "makes legislation or otherwise creates or uses a pension scheme to provide tax advantages that are not intended to be available under the QROPS rules" would find such schemes "excluded from being QROPS".
Final rules published by HMRC include requirements for Qrops providers to treat non-residents and residents of a jurisdiction in the same way for tax purposes.
The rules, which come into force on April 6 2012 also impose a requirement on Qrops to report all benefits paid out for 10 years from when a member joins a scheme, unless the member is resident in the UK for all or some of the year in which the payment is made. They also require schemes to report any member benefit payments to HMRC in writing within 90 days rather than annual electronic reporting. The rules continue to allow tax free lump sums as long as schemes ring-fence 70 per cent of the value of funds transferred into them for retirement income.
The Isle of Man’s Association of Pension Scheme Providers has been looking at changes to the island’s 50c schemes which are used as Qrops because they fall foul of of the new rules by paying benefits out to non-resident tax free while residents are taxed.
- THE NEW RULES WILL NOT BE IMPOSED RETROSPECTIVELY
You can no longer take out your pension as a 100 per cent tax-free lump sum. Instead, you will be able to take 30 per cent tax-free – an improvement on the 25 per cent you can take in the UK – but you will need to use 70 per cent of the fund to provide an "income for life".
Asset growth and net sales in 2011:
Investment fund assets in Europe decreased by 2.8 percent to EUR 7,920 billion: overall, net assets of UCITS decreased by 6.2 percent to EUR 5,634 billion, after registering net outflows of EUR 88 billion during the year. Net assets of non-UCITS increased by 6.8 percent to EUR 2,286 billion, on the back of continued strong net inflows into special funds (EUR 101 billion).
Long-term UCITS experienced a sharp decline in demand: long-term UCITS experienced net outflows of EUR 55 billion in 2011, against net inflows of EUR 290 billion in 2010. This reversal started in August when the downgrading of the U.S. government debt and the euro crisis unraveled financial markets, leading to strong withdrawals from equity, bond and balanced funds.
Intense competition from the banking sector affected demand for money market funds: money market funds continued to record net outflows in 2011, albeit less than in 2010 (EUR 33 billion compared to EUR 122 billion).
Strong demand for non-UCITS continued in 2011: special funds attracted EUR 101 billion in net new money throughout the year, as insurance companies, pension funds and other institutional investors continued to use these vehicles to invest the recurrent contributions collected from their members. This compares against net inflows of EUR 145 billion in 2010.
Key Developments in 2011:
Buoyant cross-border fund business continued to grow: the market share of Luxembourg and Ireland in the UCITS industry increased to 45.8 percent at end 2011, compared to 43.9 percent a year earlier. Total net sales of UCITS domiciled in Ireland alone recorded EUR 62 billion in 2011.
Uncertainty regarding the global economic outlook increased risk aversion in the second half of 2011: volatile stock markets and geopolitical events, coupled with downward revision of growth prospects, triggered a decline in stock prices (by way of illustration, the Euro STOXX 600 index fell by 11.5 percent in 2011) and net outflows from equity funds.
Strong growth over the last decade: UCITS and non-UCITS assets at end 2001 stood at EUR 4,617 billion. Total assets of investment funds stood at EUR 7,920 at end 2011. Total assets at end 2011 stood 72 percent higher than at end 2001 and 28 percent higher than at end 2008 during the midst of the financial crisis.
Crucial contribution to the European economy: total investment fund assets represented 63 percent of the European Union’s GDP at end 2011. This confirms the important contribution of investment funds as financial vehicles raising capital from retail and institutional investors, and providing funding to other sectors (monetary financial institutions, non-financial corporations and government agencies).
- The five year non-resident rule for scheme reporting will be changed to 10 years from the date of transfer
- QROPS must be recognised for tax purposes in their country of establishment
- Individuals will have to acknowledge the tax implications of moving their pension out of the UK – this could be a requirement prior to successful transfer of a scheme
It has been recently announced that Wealth Tax is to be re-introduced in Spain for a limited period of time. This is a temporary measure and will be reviewed on 1st January 2013. So for tax years 2011 and 2012 (submitted in 2012 and 2013 respectively) you will need to remember to include any Wealth Tax portion in your annual Tax Returns.
It is not all bad news though. With any re-introduction comes changes, and we have attempted to pick out the salient points from the announcement and these are presented below.
The new Wealth Tax will be introduced on a gradual scale from 0.2% to 2.5% with the highest percentage being paid by the owners of the largest assets. Please bear in mind that the responsibility for collecting this tax has been transferred to each individual Autonomous Spanish Community (ASC's or Comunidades Autonomas) who will be free to apply the percentages as they think fit and even to change the percentages if they think it is appropriate.
The tax exempt amount has been increased from 108,182.18 Euros (Eu) to anything over 700,000 Eu. This means that those persons with total net assets over 700,000 Eu will pay this tax. Again, please bear in mind that individual ASC's are free to change the exemption amount should they consider it appropriate. One very important change to note is that the minimum exemption amount of 700,000 Eu will also apply to Non Resident Tax Payers in Spain. There will no longer be any discrimination between Resident and non-Resident tax payers in this respect.
One subtle difference, however, remains. When calculating the Wealth Tax payable for Resident Tax Payers the exemption applies to your worldwide estate and for Non Resident Tax Payers the exemption applies to your assets in Spain.
There is a further tax exemption for residents of 300,000 Eu allowable on their main home, an example of the tax payable on a 1,300,000 Eu worldwide estate including assets held in the UK and offshore with a main home value of 400,000 Eu is as follows:
Main home 400,000 Eu minus exemption 300,000 Eu = 100,000 Eu to be added to other world-wide assets in this case 900,000 Eu. This would then be less the 700,000 Eu leaving 300,000 Eu taxable at the regional rate. Note: if the main home is valued at less than 300,000 Eu then the unused allowance cannot be used against other wealth assets.
Non-residents have a maximum tax free allowance on their assets in Spain of 700,000 Euros only. No tax is payable on assets outside of Spain. Regional tax rates will apply on all assets in Spain.
Companies from the UK, Spain and the rest of the world are not subject to the new Wealth Tax and this includes UK Limited Companies which own property in Spain.
Non- Resident Tax Payers, who are subject to paying the new Wealth Tax, are recommended to submit their annual Tax Return using a Fiscal Representative who acts on their behalf in dealings with the Tax Office. The Fiscal Representative should be appointed in the following situations:
a. When the Non- Resident Tax Payer is operating from any kind of permanent establishment, eg office or shop.
b. When the Non- Resident Tax Payer is requested to do so by the Tax Office due to the amount and/or characteristics of the assets-
c. When a non-resident owns a property in Spain, they must appoint a fiscal representative.
The appointed representative can be an individual or company but must be resident in Spain. Failure to comply will be considered to be a serious tax violation, punishable with a fine of maybe 1000 Euros.
These are: 1st Spain; 2nd France; 3rd USA; 4th Canada; 5th Ireland
Andrew Tully, Senior Pensions Policy Manager, Standard Life commented: "Retiring abroad is a dream for many people but without careful planning and advice, things can potentially go wrong very quickly." If an individual moves abroad permanently, any increases in their UK state pension will only apply if they are living in an EU country (including Gibraltar and Switzerland), or a country with a reciprocal social security agreement with the UK.
Where the individual is living outside these countries, the amount of UK state pension they will receive each year is frozen at the amount initially paid when first claimed (or if the pensioner emigrated more than one year after payment began, at the rate in force when emigrating). Popular retirement countries outside these reciprocal agreements include Australia, Canada, New Zealand and South Africa. Tully continued: "One significant consideration before you move is to think about your state pension and what, if any, reciprocal agreement is in place. If there isn't a reciprocal agreement in place, then you need to be very careful your retirement income is sufficient to cover your living costs over a long period of time. Over a 20 year retirement, your basic state UK pension could halve3 in real terms if a reciprocal arrangement is not in place."
Top tips for retiring abroad
- Seek independent financial advice before making plans about future pension provision or transferring your pension overseas.
- Check what reciprocal basic state pension agreements are in place with the destination country, if any (check with the Department for Work and Pensions).
- Inform your social security office, HM Revenue and Customs, and the Department for Work and Pensions when you move and provide your contact details abroad.
- You can get a forecast of your state pension by completing a BR19 form or go to www.thepensionservice.gov.uk. If already overseas, complete form CA3638 or call The International Pensions Centre on 0191 218 7777.
- Check your state pension age (SPA). For women, the SPA is rising from 60-65 between 2010 and 2020, with further rises to 68 currently expected to take place by 2048, although the coalition government may accelerate these changes.
- Find out about welfare rights abroad. Some UK benefits are not payable outside the UK, others apply only in the EU or in countries which have agreements with the UK.
- Tell your bank, building society and any other financial institution that you have a policy or agreement with them and are moving abroad.
- Contact your local council to let them know when you are leaving and leave a forwarding address.
- Find out more about healthcare costs in the country you want to move to.
- Inform your GP and dentist you are moving, and consider private healthcare.
In April last year the Investment Management Association (IMA) decided to include offshore funds in its sectors, bringing a further 91 funds into its comparison tables. Whilst there are pros and cons of offshore funds for UK investors, many of the cons are not apparent for expats.
The key reason for asset managers to launch funds in the main offshore jurisdictions of Dublin and Luxembourg is that they can market their funds across Europe without going through the regulatory hoops of launching in each individual country.
In terms of tax, the key consideration for investors is that a fund has 'reporting status'. This concept was introduced along with a new tax regime for offshore funds in December 2009. Reporting funds have agreed to meet certain reporting requirements with HM Revenue & Customs and, as such, attract favourable tax treatment. Many offshore funds will not pay tax at source on dividends. This allows for 'gross roll-up', which can be an advantage, as it defers the tax payment and allows for stronger compounding of returns.
Offshore funds are not automatically part of the Financial Services Compensation Scheme. If funds are recommended by an FSA-regulated firm, they should be covered by the scheme, but may not be if bought direct. They will, however, be covered by equivalent schemes in the major offshore jurisdictions such as Dublin and Luxembourg.
Perhaps the most important reason to consider offshore funds is that they can provide access to strategies or fund managers not available elsewhere. The main selling point for offshore is the sheer breadth of funds: "Offshore funds have to have appeal in a multitude of different countries and, as such, investors have more choice. There may be niche funds, investing in Thailand or Singapore for example, that are simply not available in the UK-authorised market." From a fund group's perspective there may not be enough demand in an individual country to support a domestic listing, but if a fund can be marketed across Europe and demand aggregated, it becomes cost-effective. He believes it can also act to keep total expense ratios lower in more niche strategies.
Because offshore funds have been designed to appeal to an international audience, they tend to be focused on certain types of asset class - notably bonds, international equities and hedge funds. There is little point listing a UK equity fund offshore when the majority of buyers will be UK investors. Indeed, there is only one offshore fund in the UK all companies sector and one in the UK equity income sector. The highest concentration of offshore funds is in the specialist sector, which accounts for 50 out of the 194 funds listed.
If you are a US fund management group and are faced with the choice of setting up one fund in Dublin or Luxembourg, or setting up lots of funds in individual countries, you will tend to go down the one fund route and sell it across Europe. This means that skilled fund managers such as the team at Findlay Park, which manages specialist North American smaller companies funds, are only available offshore. There is no currency risk, unless investors want to take it. Most funds have dollar, sterling and euro share classes, so investors can use their home currency to invest. Offshore funds can also be used to take positions on different currencies if necessary.
The new rules aim to make it more difficult to break residence for UK taxation purposes than to become resident again or to drift back into residence. The renowned ’91 day average test’ will cease to remain and the following rules will instead apply:
- Those present in the UK for 183 days or more will always be resident
- Those who are present in the UK for less than 10 days will always be non-resident
- And for anyone who falls outside of these narrow definitions will be reviewed through a series of tests
The tests include:
- Test A – a ‘Conclusive non-residence test’ – if certain conditions are met, the individual is definitely non-resident
- Test B – a ‘Conclusive residence test’ – if certain conditions are met, the individual is definitely resident
- Test C – an ‘Other connection test’ – if the results from tests A and B are inconclusive, the matter is determined by a combination of time spent in and a person’s connectedness to the UK. Test C operates a sliding scale whereby the more a person is connected to the UK, the less time they may spend in the UK during the year. The connecting factors include whether the individual has family, employment and accommodation in the UK, how much time has been spent in the UK in the two previous tax years and whether the individual spends more days in the UK than in any other country.
The number of factors present will set the limit on the maximum number of days a person may spend in the UK in a particular tax year. For example, if someone has four or more of the factors present in the year, the maximum number of days they can spend in the UK is 44. If they have three or more factors, the maximum number of days is 89 and so on.
Anyone who leaves the UK, for exampl,e through retirement or change of lifestyle, may find the rules restrictive and an exit from the UK would need to be planned very carefully. In certain circumstances leaving the UK for anything less than full-time overseas employment and spending more than 10 days in the UK in the year of departure, will still mean ensuring resident status in the UK for tax purposes for that year.
The Doing Business report series includes annual reports going back to 2004, a wide variety of subnational studies, and a number of special reports dealing with regions or topics.
Worldwide, more than half the regulatory changes recorded in the past year eased business start-up, trade, and the payment of taxes. Many of the improvements involve new technologies. "New technology underpins regulatory best practice around the world," said Janamitra Devan, Vice President for Financial and Private Sector Development for the World Bank Group. "Technology makes compliance easier, less costly, and more transparent."
Legal retirement age: Gradual increase from 65 to 67 over the period 2013-27.
Earnings record: Gradual lengthening of the period used to calculate full pension benefits from 15 to 25 years.
Contribution years: Calculation on the basis of monthly payments rather than rounding to the next full year as prior to the reform; increase from 35 to 37.
Percentage of full pension received: Now proportional to the numbers of contribution years; starting from 50% for careers of 15 years to 100% for careers of 37 years.
Early retirement: Postponement from 61 to 63, with limited eligibility; it will only be possible after 33 contribution years rather than 30.
Voluntary work extension: Bonuses of 2%, 2.75% and 4% for each additional year worked for careers below 25 years, between 25 and 37 and over 37 respectively.
Sustainability assessment: Revision of the system every five years from 2027, taking into account changes in life expectancy.
The pension reform still needs parliamentary approval. Without it, the chances are that Spain will face strong spending pressures due to ageing and slowing population growth. Indeed, ageing-related spending might well contribute to an increase in the debt/GDP ratio in the long term. According to the European Commission’s simulations in the so-called Sustainability Report – published before the proposal of changes to the pension system – the long-term sustainability risk to Spain’s public finances is high, together with Ireland, Greece and the Netherlands. Naturally, these simulations – while still useful – are highly uncertain. It is unlikely that bond markets will keep financing government debts amounting to a multiple of the GDP of the respective countries – or that governments will maintain their policies unchanged in the presence of ever-increasing debts.
What prompted the ruling?
The ECJ’s decision follows action bought by a Belgian consumer group. Test Achats argued that, previous exemption from the directive prohibiting the use of gender as a factor in the calculation of insurance premiums and benefits in relation to insurance contracts entered into after 21 December 2007 was discriminatory, in light of the higher principle of equality for men and women as enshrined in European Union law.
What are the likely outcomes?
All other things being equal, once implemented the ruling is likely to result in better annuity rates for women, whilst men are likely to face lower rates. However, the ECJ ruling will be only one of a range of factors, such as gilt yields and interest rates, which will affect the pricing of an annuity when we get to 2012.
Protection providers will have to equalise premiums for life insurance, income protection and critical-illness cover.
Currently, women pay less for life insurance due to their longer life expectancy but pay more for income protection.
Hargreaves Lansdown head of pensions research Tom McPhail says the decision, announced on Tuesday, will lead to “a seismic shift” in the retirement market.
He says: “It is now imperative that every investor shops around with their pension fund at retirement because if they do not, they risk ending up with a homogenised standard-issue annuity that is almost certain to be a poor deal.”
Just Retirement external affairs director Steve Lowe says: “This will give providers an opportunity to reinvent themselves because in the future they will need to provide individual, personalised underwriting. They will need to use many, many factors beyond the blunt instruments of gender and postcode.”
Legal & General head of annuity product developments Tim Gosden says: “I think you could argue the days of the conventional standard annuity are numbered now and as the enhanced annuity market develops you could argue that gender is actu- ally less of a factor as medical and lifestyle rating factors kick in.”
In the interim, providers say women could choose to defer annuity purchase to benefit from the anticipated increase.
LV= head of annuities Matt Trott says: “Rates for females are likely to improve significantly, so advisers need to consider how this affects their clients.”
Protection experts question whether the ruling will also apply to gender-based underwriting decisions and if it will eventually be extended to include factors such as age and disability.
The European fund and asset management association has published the latest industry fact sheet, which gives the investment sales data for the end of 2010. Equity funds recorded their largest inflows in December since record began. This is against a background of historically 'cheap' equity prices, and an ecouraging outlook for 2011.
Bond funds did not fair so well, mainly due to the concerns over the Euro area sovereign debt markets at the end of 2010. Money market funds continued to suffer from short-term interest rates, competition from bank deposits and recurrent year-end redemptions.
Some Key point of the report include
-- UCITS experienced net outflows in December of EUR 19 billion, down from net inflows of EUR 22 billion recorded in November. Record net outflows from money market funds were the main driver behind this turnaround in net flows in UCITS.
-- Long-term UCITS (UCITS excluding money market funds) recorded net inflows of EUR 19 billion in December, up from EUR 14 billion in November.
-- Equity funds in December attracted EUR 19 billion, up from EUR 8 billion in November.
-- Bond funds recorded net outflows of EUR 7 billion, down from breakeven point in November.
-- Balanced funds experienced slight net outflows (EUR 0.3 billion) compared with net inflows of EUR 2 billion in November.
-- Net outflows from money market funds reached EUR 37 billion in December, compared with inflows of EUR 8 billion in November.
-- Total non-UCITS recorded net sales of EUR 30 billion in December, significantly up from the EUR 14 billion recorded in November. Special funds reserved to institutional investors experienced a large jump in net inflows to EUR 30 billion in December, up from EUR 13 billion witnessed in November.
Total assets of UCITS increased by 1.3 percent in December to stand at EUR 5,889 billion. Non-UCITS total assets increased 1.7 percent during December to EUR 1,919 billion. Overall, total assets of UCITS and non-UCITS amounted to EUR 7,807 billion.
The European investment fund industry had the following developments in 2010:
-- UCITS recorded net inflows of EUR 172 billion.
-- Long-term UCITS recorded net inflows of EUR 297 billion.
-- Money market funds suffered from net outflows of EUR 125 billion.
-- Non-UCITS recorded net inflows of EUR 164 billion.
-- Special funds enjoyed net inflows of EUR 144 billion.
-- Overall, UCITS and non-UCITS experienced net inflows of EUR 335 billion.
Recent events have shown that we cannot trust the banks either, so why should we trust a QROPS provider? The majority of QROPS providers are small independent companies. Their size and lack of financial accountability makes them vulnerable to external forces such as weakening their rules or creating questionable products in a rush to grab a share of this huge market. Furthermore, the lack of understanding and the scale and breadth of expertise in this relatively new market has significantly contributed to the misconceptions that prevail around QROPS.
We do not need to look much further than the recent Beazley case, and at other supposedly bona fide QROPS providers who have been closed by HMRC, to see the pitfalls. Singapore was a major case in point where, because the jurisdiction was apparently allowing 100% commutation, HMRC decided that Singapore schemes didn’t qualify as a ROPS – recognised overseas pension scheme. Holborn Assets recently commissioned a legal viewpoint from a UK lawyer and highly regarded expert on pensions to help us draft our own in house standards.
Among a multitude of other things, the lawyer drew our attention to the other problem in Singapore. This being that though the country has a regulated pensions industry, it is only for government pensions for Singapore residents. Because its regulator didn’t regulate any other type of pension, the non-regulated pensions couldn’t qualify as a ROPS.
A ROPS is the first step to getting QROPS status; it’s effectively done by self-assessment when applying for QROPS status. That’s why HMRC’s website where it shows the list of approved QROPS, now contains the following statement which every adviser should be acquainted with (note the highlight):
This (approved) list is based on information provided to HMRC by these schemes when applying to be a QROPS. As part of its application, the scheme notifies HMRC that it fulfills the requirements for being a “recognised overseas pension scheme”. Publication on the list should not be seen as confirmation by HMRC that it has verified all the information supplied by the scheme in its application.
If a scheme has been included on this published list in circumstances where it should not have been included because it did not satisfy the conditions to be a recognised overseas pension scheme, any transfer that has been made to that scheme could potentially give rise to an unauthorised payments charge liability for the member (see RPSM14102020).
This is why I part company with Sarah, not only can’t we trust the QROPS providers (or institutions) to police the industry; we can’t necessarily trust that the QROPS provider is going to be around next year. It isn’t all just Singapore and Hong Kong either. Some of the so called leading providers in the more respected markets of the British Isles and its dependencies are now being questioned – with some controversy currently in the Isle of Man, while the actions of some of Guernsey’s apparently most reputable firms are also questionable in my opinion.
- Removal of ‘age 75 rule’ – from age 55 people can buy an annuity or access a DP at any time. Or they can choose not to take an income and defer a decision indefinitely.
- DPs will be available in two forms: ‘capped drawdown’ and ‘flexible drawdown’.
- Capped drawdown will be similar to USP – income withdrawals subject to government actuary’sdepartment (GAD) limits. However the maximum withdrawal (currently ‘120% of GAD’) will change to ‘100% of GAD’.
- The maximum withdrawal under capped drawdown must be reviewed at least every three years, until the end of the drawdown pension year in which the individual reaches age 75, and every year thereafter. (Currently it is every five years pre 77 and every
- year thereafter.)
- GAD will issue updated tables of rates including ages beyond age 75 for use with capped drawdown.
- Existing ASPs will switch to either of the two new types of DP arrangements above from 6 April 2011. The default route will be capped drawdown
Uncrystallised funds no longer default into USP/DP the day before age 75.
Flexible drawdown will allow accelerated, unlimited withdrawals of the pension fund as long as the individual can meet a minimum income requirement (MIR). Withdrawals will be subject to income tax at the individual’s marginal rate.
- The European Securities and Markets Agency (ESMA),
- The European Banking Agency (EBA)
- European Insurance and Occupational Pensions Authority (EIOPA)
The consultation sets out four options:
- A loan model allowing individuals to borrow from their pension fund
- A permanent withdrawal model, allowing access to funds without repayment obligations – possibly in limited circumstances, such as in cases of hardship
- Early access to the 25% tax-free lump sum currently available from age 55
- A ‘feeder-fund’ model, creating a more flexible savings product linking liquid savings products, such as ISAs, and pension savings together into a single account.
The paper sets out different models for early access as either a vehicle to encourage saving or a safety net for people struggling to make mortgage payments.
‘Linking pension savings to repossessions would have net benefit for individuals, especially considering the potential effect on their income in retirement, and any wider implications for the housing market and mortgage lending behaviour,’ said the paper.
However, the paper also warns that an early access option limited to repossessions could expose the pension to more risk by transferring assets into property.
Over the past few years, one of the most popular products discussed by financial advisors dealing with expats is “QROPS”. As many people will already be aware, this is a product that allows a previous UK resident to move their UK pension pot overseas. The benefits of this are usually lower tax implications, and greater flexibility. The area that has caused most controversy is the releasing of capital from the pension fund, some providers have promoted the possibility of drawing above and beyond the 25% tax-free standard capital lump sum.
This area has caused the biggest debate, due to the structure of a QROPS. Essentially it is a pension wrapper, that holds the pension funds in an alternative country/jurisdiction to the UK. After 5 years of a client being overseas, there is no longer the need for the pension administrators to keep the UK HMRC informed of the QROPS activities. It is at this point that some QROPS providers have been using their local pension laws (e.g. Singapore, New Zealand) to release more than the 25% lump sum to the client.
“Well, what’s the problem ?”
Whilst many clients would like the idea of releasing a bigger chunk of their pension as cash, it is not what a pension is designed for, and certainly not what the UK HMRC would allow at home. Contributions to the pension have received tax relief in the UK. So, the HMRC do not want ‘loopholes’ that allow that pension pot to be moved overseas and released as tax free cash.
Singapore is an example, where the above has taken place, and as a result the HMRC have shut down the scheme altogether. This clearly causes an issue for those that have moved their pension scheme to Singapore, and may find it frozen, and/or receive a hefty tax bill (at least 40%)
Another example is the removal of ‘recognised status’ for the Beazley Consulting pension scheme. This Hong Kong based scheme, had approval removed, after it had already done considerable business with clients. This case demonstrates that :
- Even if QROPS schemes feature on the recognised list, HMRC can remove its status and retrospectively apply the punitive tax charges to individuals if it so wished.
- Appearance on the list does not constitute full ‘approval’ of the scheme by HMRC – only that HMRC has accepted a notification to recognise the scheme
How do I avoid these issues ?
It is impossible to guarantee any QROP’s as 100% safe, however there are steps that can be taken that will greatly reduce, and virtually remove the risk of the above mentioned.
- When the pension is moved to a QROPS, stay within reasonable terms and conditions, that would be expected if it was still in the UK i.e. do not withdraw over 25% cash lump sum.
- Deal with a QROPS provider that is in constant communication with the UK HMRC, and is doing everything they can to ensure compliance.
- Look for well documented and regulated advice. There is a wealth of information on QROPS, and research tools such as Select-A-Pension, now allow detailed cost/benefit analysis of moving a UK pension overseas.
France and Spain are top for quality of life
The UK and Ireland are the worst places to live in Europe, while France and Spain are the best, according to the latest uSwitch Quality of Life Index.
The UK came 9th out of the 10 European countries in the Index, thanks to high living costs, below average government spending on health and education, short holidays and late retirement. Furthermore, the UK no longer enjoys the highest net household income in Europe. Last year it was £10,000 above the European average, whereas now it is only around £5,000 above, slipping below Ireland, the Netherlands and Denmark.
The Index shows that people in France enjoy the highest quality of life, closely followed by Spain, while Denmark, Poland and Germany helped to make up the top five spots, with all these countries offering more days of holiday and a lower retirement age than the UK and Ireland.
Ann Robinson, director of consumer policy at uSwitch, said that last year, compared with our European neighbours, Britons were miserable but rich. "This year we're miserable and poor. Whereas some countries work to live, UK consumers live to work. In fact we work harder, take less holiday and retire later than most of our European counterparts," she added.
Given how the UK compares, one in three thinks that now would be a good time to emigrate, and France appears to be top of the list. With nearly 20million of us going there on holiday every year, it's perhaps no great surprise that it's way ahead of its European counterparts for quality of life.
Data from Conti also highlights the current popularity of France and Spain, as the preferred locations for Britons buying property abroad. Clare Nessling, Conti's operations director, says: "The percentage of people enquiring about French mortgages has more than tripled over the last two years, and it's currently out on its own as far as popularity goes. Spain is still holding on strong, and has experienced an increase in enquiries over the last year, despite the negative headlines, and still accounts for a quarter of enquiries received.
"It's clear that investors are favouring the tried and trusted locations when it comes to overseas property. But they also want easy access, good rental opportunities and security with price appreciation over the long term. On top of this, the falling value of the euro has made property in the eurozone around 10 per cent cheaper to British buyers over recent months, so this is also contributing to the increasing popularity of France and Spain."
It was also announced that the lifetime allowance on pension saving would fall from £1.8m to £1.5m. The move will come into effect next April, and should raise £4bn a year, affecting 100,000 pension savers, 80% of whom have incomes exceeding £100,000 a year,
Tax experts have welcomed the announcement following a period of uncertainty after June’s emergency budget, in which it was announced the limit was under review.
George Bull, head of tax at Baker Tilly, said: “After a period of considerable uncertainty, this clarification will provide peace of mind for many people trying to make adequate provision for their retirement income in a time of economic instability.
Once the new limit is in force, we urge the Government to refrain from future tinkering in order that people can have confidence about their own pension planning.”
This may affect some UK pension holders who where building significant pension savings, in a hope to move their pension offshore in retirement, and benefit from more leniant offshore pension rules (e.g. QROPS and QNUPS)
In a letter sent to members last week Beazley said: ‘HMRC…have now decided as a result of a technical nicety, that the Beazley scheme can never have been a Qrops. They have, as a consequence, revoked our status. Whilst we tried vigorously to persuade HMRC otherwise, by analysis of the terms and conditions of the scheme, this was insufficient and we feel unable to do anything further.’
Members of Qrops which lose approval in this way are liable to a 55% unauthorised payment charge including a 45% charge plus a 15% surcharge both dated from the time of the transfer.
However, HMRC has agreed to review the circumstances of each member’s transfer after negotiations with Beazley’s legal adviser, DLA Piper. Each review will look at the advice given to the member to establish whether the transfer into the Qrops was done ‘in good faith’ as part of retirement planning advice.
‘This is an entirely unprecedented and genuine offer by HMRC to manage the tax administration on a fair and equitable basis,' said Beazley in the letter. In order to achieve waiver of the charges, you need to demonstrate that you acted in good faith and had genuinely intended to transfer to a Qrops, with the sole intention of providing for your income in retirement.'
UK Compulsory annuities to be scrapped
The new proposals introduce a two-track solution where investors can choose between capped or flexible drawdown schemes.
- Under the capped rule, individuals will be able to choose how much to draw down annually from their pension pot throughout their retirement (subject to a capped limit), or whether to draw any income at all.
- Under the flexible model, if an individual satisfies a minimum income requirement (yet to be set), they will be able to draw down unlimited amounts from their pension pot.
The removal of the age-75 limit will also mean that people wanting to buy an annuity can time their purchase to maximise the income they get, rather than being forced into buying when rates are low.
"Realistically, people on very small pension pots might not satisfy the minimum income requirement, so will have to buy an annuity anyway – the vast majority of annuities are purchased with relatively small pension funds of £50,000 or less."
The current 82% charged on ASP includes inheritance tax (without it is 70%). Under the consultation IHT will no longer “ordinarily” apply on passing after 75. However the government has said it will monitor the situation and that it will clamp down on any signs of abuse.
- To reduce the maximum tax allowable contributions from £255,000 to £40,000.
- To consider restricting the tax relief to 40% for those on a 50% rate income tax.
- To reduce the level of the lifetime allowance.
- To consider removing the exemption from the Lifetime allowance, from those with enhanced protection on growth of their pension funds.
- For expats : the ability to pass on the entire fund after passwing without UK tax applying.
- For UK residents : the ability to make contributions to a QNUPS (no tax relief applies), with inheritance tax protection and investment flexibility.
- For non-UK residents : with a pension fund which has enhanced or primary protection. Transferring to a QROPS will help secure the pension from UK ammendments to the protection and a possible future lifetime allowance charge.