UK Pension Transfers – Understanding International SIPPS
Demand for UK Pension Transfers Overseas remains high among UK expats despite UK taxman’s constant adjusting.
For many advisers focusing their efforts on a market that has reduced by 75% over the past four years might not seem like a sensible idea.
But the falling number of UK Pension transfers to qualifying recognised overseas pension schemes (Qrops) since the 2014/15 UK tax year is due to several factors.
And this is concealing the reality of a buoyant international UK pension transfer market still almost at historic levels.
Complication not simplification
Qrops were originally created as part of the UK pension rule changes in April 2006; which, at that time, heralded the so called ‘pensions simplification’ revolution that aimed to sweep away decades of complicated legislation in one go.
Since that date, individuals have been able to transfer their UK pension savings in a registered pension scheme to a Qrops – a pension scheme based outside the UK that meets certain requirements laid down by HM Revenue & Customs.
However, with constant UK rule changes since 2006 and recent local changes to schemes based in Malta, we can see that Qrops UK Pension Transfers are at a all-time low.
The biggest of these change to pension rules impacting Qrops came in the UK Budget of Spring 2017 when the chancellor Philip Hammond announced that transfers would be subject to a new overseas transfer charge (OTC) from midnight that same day.
This essentially meant that, with immediate effect, all UK Pension Transfers relating to non-EEA based scheme members would be subject to a punitive 25% penalty from the transfer value proceeds the only exception being those non-EEA based Qrops transfers where both member and scheme were in the same country.
Lack of notice
While Qrops rule changes have progressively seen their potential benefits whittled away for UK expat members to mainly around lifetime allowance (LTA) planning opportunities, UK pensions over the same time have been boosted by progressive rule changes.
This is especially true of the unexpected ‘Pension Flexibility & Freedoms’ for UK money purchase schemes that the UK chancellor George Osborne announced in the Spring Budget of 2015.
With the relative short-notice given to the pension providers and the comprehensive nature of these measures, many existing personal pension plans in the UK market could not offer these new freedoms from day one, with most initially relying still on old-style annuity options for income in retirement.
Also, changes that simplified death benefit rules around reference to age 75 and a taxation based on marginal income tax rather than the old 55% rate meant that there was chaos for several weeks in some provider claims teams until their new processes had bedded in.
Therefore, much of the immediate demand for this new type of flexible drawdown pension scheme was met by self invested personal pension (Sipp) schemes that were on newer IT technology systems that could quickly adapt to immediately meet the new rules.
However, for the UK expat client a barrier often encountered was the fact that most providers would only deal with UK advisers and/or clients when it came to transfers in.
UK Pension Transfer to International Sipps
In these circumstances International Sipps were well placed to meet the expat demand and much of the drop off in the Qrops transfer market from 2014/15 has since been diverted into this market segment instead.
This is especially true outside of the EEA where since 2017 clients no longer have access to Qrops (except where transferring to a receiving scheme in the same country of residence) and even the case within the EEA where clients with transfer funds not impacted by the LTA – the majority of UK Pension Transfers – now want to move to a more cost-effective option instead (International Sipp fees typically being 50% of those charged by the Qrops schemes).
Although called ‘International Sipp’ it should be noted that these schemes are UK-registered pension schemes but with the benefit that they work for expat clients and advisers.
However, despite these benefits and their timely ability to plug the gap created by successive Qrops rule changes, they have not been without their issues and frustrations.
In recent years they has been a marriage between third party pension administrators/trustees based in Malta and investment providers based in the Isle of Man or Dublin.
This set up can involve clunky and manual administrative processes that are often associated with delays and creates multiple opportunities for human error to occur along the process chain for transfers in, investment of funds, and access to valuations etc.
However, with online technology readily available via offshore investment platform providers the good news for advisers and UK expat clients is that these frustrations can now easily be eliminated by accessing a cost-effective International Sipp from a single provider with a simplified scheme/investment solution that offering a more efficient and automated error-free experience instead.
Given the push from global regulators for client access to transparent, flexible and low fee products & services this latest development in the International Sipp market means that ‘Pension Simplification’ is a realistic expectation today after all.