NEWSLETTER: SIPP/SSAS/QROPS2012- Updates and Reminders

Contributed by MW Pensions. [www.mwpensions.co.uk]

This Newsletter is intended as technical support for Financial and other professional advisers. Members of the general public should not rely upon it

SIPP fees
The FSA is, understandably, constantly pressing the financial services industry to be clear and open about fees and charges. This is something we support very strongly. We are often asked by IFAs about our fees, as they may appear high compared with some other SIPP Providers. However, it is important to ensure that the advisor and indeed the client are truly comparing like with like. With some SIPP Providers there are hidden or opaque fees and charges. Therefore, in order to ensure they are “treating customers fairly” an advisor needs to properly analyse all aspects of the charges being made. Let’s break it down into the key areas:

The basic fee and what does it cover?
Is it clear what the core basic fee is – in other words, what fee is paid each year to cover the services that the SIPP Provider must provide each year, such as basic day to day administration, the annual valuation statement etc? If a fee is quoted, is it a flat fee or a percentage of the fund value? If the latter, is the value on based on bid or offer price? At what date is the value taken?  Is it capped? Is VAT payable? Is it clear what services are provided for that fee and what may or will lead to additional fees?

The MW position
Our fee schedule clearly sets out what the fee is and precisely what services are covered by that fee. For our full SIPP, the fee is fixed at £600 a year. For the Acorn “starter” SIPP, the fee is 1% of the fund value at bid price, with a minimum of £250. It is capped at £600.

VAT is additional on all our fees (but we offer the option for fees to be paid by the member’s company (if there is one) so that potentially the VAT can be reclaimed (provided it is a legitimate business expense).

Does the SIPP Provider receive any income from any investments in the SIPP?
Many SIPP Providers receive income from some or all of the investments in the SIPP? Is it clear what they receive via such payments – which investments produce income for them and how much income do they receive? Is their income capped? Is there an option for them to rebate the income to the SIPP? What formal links are there between the SIPP Provider and investment house? Is there any requirement for any monies in the SIPP to be so invested?

The MW position
It is quite simple. We do not take any income from any investment, or any commissions.

Does the SIPP Provider receive any income from any bank SIPP bank account?
This is (quite rightly) a big bugbear of the FSA. Many SIPP Providers receive income from monies held in a SIPP bank account. Is it clear whether the SIPP Provider receives such income? Is it clear what their “turn” is? Is it tiered – does the SIPP bank account pay say 0.1% interest on the first £X and 0.2% on the next £Y in the account etc? Is it capped? What interest rate is actually given on monies held in that SIPP bank account?

Does the SIPP member have the choice not to use that bank account – can they decide to use another bank that does not pay income to the SIPP Provider, for instance? Does the bank pay any income/commission to the advisor?

The MW position
It is quite simple. We do not take any income from any bank. The underlying SIPP bank account is with Pensions Bank Ltd and the only requirement is that at least £1000 remains in that bank account at all times (that is to cover fees etc). The balance can be transferred to any bank of the member’s choice. The interest rate payable on the Pensions Bank account is fully disclosed and available for the member at all times.

We do not pay any incentive or commission income to any advisor (if the client has agreed that the advisor’s agreed fees can be paid from the SIPP assets, then we arrange such payments).

What about non-standard work?
Is it clear when extra fees will be charged? For example, what fees apply if a drawdown calculation or payment is required? What if a non-standard investment such as property or a UCIS is required? Are the fees fixed and known in advance or are they based on time spent?

The MW position
Our fee schedule clearly sets out when extra fees will be incurred and what they will be. There are no surprises!

The end of Contracting Out
From 6th April 2012 previously contracted out members will begin to accrue benefits under the State Pension’s Second, Tier, S2P and will no longer be entitled to reduced National Insurance rates or rebates. Furthermore, the restrictions which previously applied to Protected Rights will be abolished, allowing these to be treated the same as ‘non-protected’ rights. This will mean that:

• It will be possible to transfer Protected Rights to other forms of pension arrangement which were previously prohibited, such as SSASs
• Schemes such as the MW SIPP and MW SIPP 2 will no longer be obliged to provide certain survivor’s benefits – currently Protected Rights must be used on the death of the member to provide income to certain defined survivors
• It will no longer be necessary to make Protected Rights separately identifiable from non-Protected Rights, thereby for instance simplifying SIPP administration.

The changes apply to all contracted out money purchase schemes, the money purchase section of mixed benefit schemes and contracted-out personal pension schemes
Trustees are obliged to tell members that their scheme has ceased to be contracted out (within one month) and that they will instead build an entitlement towards S2P (within four months). Alternatively, this information can be provided to members at any point in the 12 months up to 6 April 2012. Employers are also obliged to advise employees of the change to their contract of employment, i.e. ceasing to be in contracted-out employment.

Whilst contracting out will cease on 6th April 2012, rebates relating to service prior to that date will continue to be paid after that date and trustees are required to inform members if such a rebate is received.
Proposed changes to QROPS
The Government is proposing some key changes to QROPS from 6th April 2012. These are detailed in the Finance Bill 2012, and are subject to consultation until the end of January. HMRC have published guidelines that can be found at: http://www.hmrc.gov.uk/pensionschemes/draft-guidance-qrops.pdf

The main proposed changes are:

• The five year non-resident rule for scheme reporting (currently 5 full tax years from date the member ceases to be a UK tax resident) will be changed to 10 years from the date of transfer – not the date they cease to be UK tax resident
• The local tax rate on benefits taken from the QROPS scheme MUST be the same for residents as for non-residents.
• 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 is important to remember why HMRC are proposing changes – basically because of abuse by certain advisors, notably recently by using New Zealand QROPS. As general background, the retirement savings basis in New Zealand (for local residents) is that there is no tax relief on contributions, but the benefits can be taken on retirement as a 100% tax free lump sum – akin in some ways to the old UK FURBS basis. So some “advisors” have been using this to transfer UK tax relieved funds (for those who have been outside UK tax residency for more than 5 full tax years) to a New Zealand QROPS, as a result producing for the member a 100% tax free lump sum (less no doubt significant fees for the advisor). HMRC quite rightly want to stop this, as it is clearly an abuse, since tax relief in given both on contributions and on benefits. The fundamental HMRC rule is that at least 70% of the assets must be used for retirement income – in other words, the maximum tax free lump sum a jurisdiction can offer for a QROPS scheme is 30%, and Providers have to sign up to this to get QROPS status.

The key main two proposed changes are:

• The change in reporting benefit payments etc to HMRC from 5 full tax years from the date the member ceased to be UK tax resident to 10 years from the date of QROPS transfer. This seems to us to be bizarre and wrong. Most QROPS schemes (because they are specialist schemes and written in a non-UK jurisdiction) have fees that are higher than UK SIPP fees. This is a reflection of the additional workload and administration associated with offshore schemes. Accordingly, many UK expats (who have been non-UK tax resident for well over 5 years) have deferred arranging a QROPS until they want to actually take benefits, preferring to retain their UK pension assets in a (cheaper) UK scheme such as a SIPP.. Why pay higher fees when there is no need?

Consider someone aged say 74, who has lived in Spain for 20+ years, and who now wants to start drawing benefits from their UK pension assets. Currently they can simply arrange a QROPS transfer to the Isle of Man, say, and immediately take a tax free lump sum of 30%. Under the proposals, the member could only take a 25% tax free lump sum, unless they waited 10 years until they were 84, when they could then take a 30% tax free cash sum. So sadly it is the member who would lose out. This is hardly “treating customers fairly”. If HMRC want to restrict tax free cash to 25%, then they should simply change the QROPS requirement to a maximum of 25%.

• The requirement that the tax rate applicable to benefit payments is the same, in the country in which the QROPS is based, for residents as for non-residents. This causes a major problem for Guernsey, for example, where non-residents have a zero tax rate (and residents don’t). It remains to be seen whether this is an issue for the Isle of Man 50C scheme, which although technically open to Isle of Man residents is in fact tax inefficient for local residents.. In our view, HMRC are solving the wrong problem by proposing this change.

Let’s go back to fundamentals. QROPS exist because HMRC recognise that some British tax payers will, for whatever reason, decide to emigrate. HMRC have traditionally taken the view that for every Brit who emigrates, someone will immigrate to the UK, eg from the Commonwealth or from within the EU. So whilst the UK will lose out on tax income from those who draw their pension overseas (having transferred it out under QROPS) the UK will gain from those who move into the UK and transfer their pensions here, and who then draw them here and pay UK tax on the benefits payments. It is classic “international mobility of labour”.
 
Unfortunately, many countries, especially those under “Napoleonic law” such as France, Italy and Spain, have legal systems which can make it difficult for those who move to live and retire there to transfer their UK Pension assets to a local scheme and they may therefore wish to transfer their UK pensions to a third jurisdiction such as Guernsey or the Isle of Man. They will then draw pension from Guernsey or Isle of Man and pay local taxes on their benefit payments – so if they are living in Spain they will pay local Spanish income tax on their pension withdrawal payments. Neither Guernsey nor the Isle of Man currently makes any withholding tax charge, so the member is being treated fairly. As a result, neither Guernsey nor the Isle of Man as a jurisdiction is taking any tax income from the member. The only “benefit” to them is that the QROPS transfer will create employment on their Island and that in turn may lead to additional local tax revenues via income tax paid by those employed locally in the QROPS marketplace. But the member is being treated wholly fairly from a tax point of view. How can HMRC consider that to be unfair?

If the HMRC proposals go through, then, unless there is a Double Taxation Agreement (DTA) in place between the country to which the QROPS transfer has been made and the country in which the member resides, the member will lose out – because the member will have to pay Guernsey/Isle of Man tax (at the same rate as is applicable to local residents) and will not be able to offset it against the local income tax they will pay in their country of residence unless there is a DTA in place between Guernsey/Isle of Man and their country of residence – and those jurisdictions have very few DTAs. Indeed it may lead to members paying tax in both their place of residence and in the QROPS jurisdiction. The main winners will be those countries in the EU that do or can offer QROPS arrangements. This is because the EU per se generates many DTAs for its member states - the best example of an EU country that is geared up to accept QROPS transfers at the moment is Malta, which is in the EU and has DTAs with over 50 countries.

Ironically, it may even favour New Zealand where the rate of tax on pension income for both residents and non residents is 0%.

The MW view
From a commercial point of view, it does not affect us. We are able to provide QROPS products in many jurisdictions, including Isle of Man, Guernsey and Malta. We have long been saying that choice of jurisdiction is critical. Whilst we do not provide any advice as to which jurisdiction is best in certain circumstances (it is for financial advisors to provide such advice) we also believe in a level playing field and believe that the two critical proposals above are fundamentally flawed. In our view, keep the existing reporting requirements and put in place QROPS rules that are robust, but which also allow EU and non-EU jurisdictions to compete fairly. Don’t penalise the poor member!   

Trivial Pensions
There is a further relaxation of the triviality rules from 6th April 2012. At the present time, someone over age 60 can commute all their pension assets for a lump sum, provided their total pension assets are less than £18,000. From 6th April 2012, provided they are aged at least 60, they will be able to commute and pension (including a SIPP) that has a current value of less than £2,000, even if their total pension assets exceed £18,000. As at present, 25% will be tax free, and the balance will be subject to tax at the member’s marginal rate of income tax. Such commutations can only be taken twice at present. 

Gilt Yield for Drawdown
The gilt yields to be used for drawdown calculations are:

We do not give financial advice and no comments here are intended as such. The above information is based on our understanding of the legislation governing pensions at the time of writing. Before taking any action you should consult a qualified financial and/or tax adviser. Levels, bases of and reliefs from taxation may be subject to change.

This Newsletter is intended for professional advisors only, not members of the general public

January 2012

MW Pensions Ltd
Oaklands Park
Hooton Road
Hooton
South Wirral CH66 7NZ

Tel: 0151 328 1777  Fax: 0151 328 0707    

website: www.mwpensions.co.uk  e-mail: admin@mwpensions.co.uk

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