Pensions push hits new olim
PHILLIP HAMMOND’S first budget has resulted in the loss of one of the most significant tax breaks for olim. One line in his speech will cost future olim millions of pounds in additional tax in future. By initiating a 25 per cent upfront charge on pension transfers (for non-EEA residents) the Chancellor effectively removed qualifying overseas pension schemes (QROPS) from the tax-planning toolkit of British olim.
QROPS are offshore pension schemes. Olim could transfer their pensions to an offshore jurisdiction such as Malta or Gibraltar and then not pay any income tax for 10 years — and, more importantly, there would be no tax on death. This was a very attractive proposition, used by many olim.
As a result of recent UK changes to pension flexibility, it has been possible to move your UK pension to a QROPS and take out 100 per cent of the fund, tax-free. I was often asked by potential clients if they could move to Israel and take all their money out of their pension tax-free. Although it might have been within the letter of the law, it seemed to be against the spirit of pension legislation and therefore not something I encouraged. People receive tax relief on pension contributions to incentivise savings for retirement and to provide an income for life. Taking 100 per cent of the fund and not paying tax is not what HMRC had envisaged when giving upfront tax relief. This has been happening in some parts of the world for the past six to 12 months. It is surely not a coincidence that after 10 years of a working QROPS regime, the rules have been radically tightened, within months of the “abuse” starting. There is a lesson here. If you push the rules too far and HMRC sees what it feels is abuse, it will clamp down on it. It is also worth mentioning that those people who moved to a QROPS in the past can continue with the benefits they currently enjoy.
So what should olim now do with their UK pension funds? There are two aspects to this question — the tax efficiency of the pension and the investments inside the pension scheme. Clearly pensions are not going to be as tax-efficient as they were for olim and people may consider moving their
One line of a speech has cost future olim millions