A long-standing feature of Australian pension law has been the ability to take up to 100% of a superannuation (generally abbreviated to "super") fund as a lump sum, often without any obligation to use it to buy a pension or a lifetime annuity (although if invested otherwise the income generated is taxable). The law is changing radically from 1 July 2007. The "Simplified Superannuation" reforms mean that on retirement in Australia after age 60, any payments from a taxed super fund (ie practically any non-public-sector pension fund), including lump sums, will be tax free.

This posed an immediate threat to all transfers to Australia from UK registered pension schemes, because the receiving scheme would be unable to meet one of the required conditions to be a qualifying recognised overseas pension scheme (QROPS), ie that all or most of the benefits must be subject to tax because tax relief has been given on the contributions in the UK ("primary condition 2" in SI 2006/206 Reg 2(3)).

Consequently there has been an acceleration in this market, to beat the deadline. The latest update to the list of QROPS [PDF] was published yesterday - the third update to appear in as many weeks. Previously the list had been updated at the beginning of each month. Fourteen Australian 'super' funds have been added to the list since 14 May, making 190 in all. Only the Republic of Ireland, with 200, currently has more entries. (Not all the newly-added schemes are Australian. In addition, three schemes have been removed from the list during the past three weeks, one from the USA and two based in Guernsey.)

However, HMRC has been working to resolve the problem and has just published amendments to the relevant regulations. The Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) (Amendment) Regulations 2007 (SI 2007/1600) amend primary condition 2 to provide another way of satisfying it, namely that the scheme is liable to taxation on its income and gains and is a "complying superannuation plan" (the definition is quite convoluted; HMRC proudly reproduces it in full in an annex to the Explanatory Memorandum [PDF] to the new regs). HMRC is apparently content that the new Australian 'ETE' (Exempt-Taxed-Exempt) regime will "overall still have broadly equivalent tax advantages to UK schemes".

This amendment will mean that Australian schemes in general can continue to qualify as QROPS. On the other hand, the maximum amount which can be contributed via a transfer in to an Australian scheme is set to fall from the present $A1m to just $A150,000. There may be ways of getting around this barrier (Aries Members will find some useful information in the Discussion Zone thread on this subject). Meanwhile, it is thought that the present rule mandating transfer within six months of emigration to Australia (lest the individual face a swingeing tax bill in their new home) continues in force.

Other QROPS issues

The Society of Pension Consultants (of which Aries is an active member) has been discussing with HMRC the problems arising from the fact that it is not obligatory for a scheme with has been granted QROPS status to consent to its inclusion on the published list. The reason why some QROPSs are not shown there, HMRC says, is that HMRC is under its own legal duty of confidentiality, as imposed by section 18 of the Commissioners for Revenue and Customs Act 2005. Section 18 (1) prohibits HMRC from disclosing data held for any of its functions. Although sections 18(2) &(3) and Section 20 provide certain exemptions from section 18 (1), section 18(2) (h) requires "the consent of each person to whom the information relates". Consequently HMRC can only disclose information in respect of a QROPS that the scheme consents to, and some schemes have not agreed to their names being publicised.

HMRC nevertheless expects the vast majority of schemes registering for QROPS status to consent to being included on the list (in fact this is the default assumption). The exceptions are likely to be "family schemes" where the number of members transferring is likely to be very limited so they don't see the need to publicise their status.

If a scheme ceases to be a QROPS, HMRC will remove it from the list ASAP. HMRC has promised not to consider a transfer unauthorised if it subsequently transpires that the receiving scheme is not a QROPS, as long as the scheme administrator can demonstrate that they made "reasonable checks", including getting a copy of the letter from HMRC confirming QROPS status, as well as checking the scheme appears on the list. A check should also be made immediately prior to making the payment (ie a last minute check that the scheme is still on the list). The fact that the list was checked needs to be evidenced - HMRC suggest keeping printouts of both checks on file.

If the scheme does not appear on the list, the scheme administrator should ask the overseas scheme why. If the scheme has only just received QROPS status and has not been put on the list yet (this will be rare if the recent increase in frequency of updating is maintained), a telephone call to HMRC will confirm that fact . If the scheme has agreed to be on the list, HMRC will be able to confirm that status. If there is another reason for not being on the list, the scheme administrator will need to be satisfied that it is legitimate.

Another possible problem with the QROPS legislation, first highlighted by actuarial consultants Lane Clark & Peacock, concerns the way the annual allowance (AA) test works for any member with defined benefits who has transferred benefits to a QROPS. In essence, the legislation seems to require double-counting of the amount.

For AA purposes, an amount is added back to the closing pension input amount if:

a) there is a transfer to a QROPS (FA 2004 s.236(4)(b)); and/or

b) there is a BCE (FA 2004 s.236(8))

The fact that a transfer to a QROPS is itself a BCE (BCE 8) does not seem to prevent double counting unless s.229(3) applies (i.e. total crystallisation).

It is obviously inequitable for an annual allowance charge to be imposed on the member as a result of double-counting a QROPS transfer: HMRC apparently claims this is neither the policy intention nor, indeed, that way the legislation should be read. Published clarification is being sought as the value of an overseas transfer could quite often exceed the annual allowance (£225,000 in 2007/08).

Acknowledgement