Rishi Sunak, the then Chancellor, famously stated in March 2022 that “the lifetime allowance (LTA) limit would be frozen at its current level and would remain frozen until April 2026”.

What is the Lifetime Allowance?

Introduced originally in 2004, the LTA is the amount that can be saved in all UK pension schemes without incurring a tax charge.

Gordon Brown and the Labour government in 2006 set a limit of £1.5m which rose over five years to £1.8m ($2.25m, €2m). In 2012, it was cut to £1.5m and over successive years was cut further by the Conservatives to £1m by 2016.

After 2016, the figure was legislated to rise by inflation. However, by 2020, it had only grown to £1.073m.

Pension contribution limits for tax relief were £215,000 per annum in 2006 and went up to £255,000. They then fell under the Conservatives to £40,000 per annum and Hunt has now confirmed that the limit will increase to £60,000 per annum – but only tax relievable if you earn less than £260,000 per annum.

We should all be rejoicing with the removal of the LTA, it is great for everyone. Here comes the but.

The Labour Party, currently in opposition but far ahead in the opinion polls for next years’ general election, have already vowed to reverse the policy and re-introduce the LTA if elected.

Not to mention that in the past 20 years or so, history has shown that pensions have been abused by the Treasury and changed, seemingly at will from year to year, offering no comfort that the abolition of the LTA will stick longer term.

One of the main reasons Hunt announced this measure is that there is a major issue with doctors, surgeons, dentists and other NHS staff retiring early, as their state funded final salary pensions start exceeding LTA calculations. What is often missed out is that an awful lot of civil servants in Whitehall also have the same problem.

Politically, Hunt hopes this measure will help retain or convince these workers to return to the NHS. Politically however, this may backfire. According to ONS (Office for National Statistics) in 2021, less than 2% of individuals in UK have Pension pots over £1m. Cannon fodder for Labour as Conservatives historically give more tax breaks to the rich.

Why did Hunt not simply re-introduce the inflation link and back date it? The LTA would now stand near £1.233m.

How this effects the Qrops market?

It would be disingenuous to say there will be no effect to the Qualified Recognised Overseas Pension Scheme (Qrops) market, especially until the dust settles, and everyone has had the time to digest and understand what the changes mean to them.

However, the changes will most likely have an effect, if at all, at the ‘retail’ end of the market, where unfortunately, the Qrops market has seen most of its issues in the past, with unregulated advisers using products paying high commissions hidden from their clients through complex charging structures.

For those looking to move abroad and who will comply with the rules to avoid the overseas transfer charge, why would you leave your pension in the UK?

Transferring to a Qrops protects you from future meddling and the uncertainty of the constant chopping and changing for political gain which has been prevalent in the last couple of decades.

Clients can also avoid having their income taxed using an emergency tax code or having to battle with the HM Revenue & Customs (HMRC) for a NT tax code, to be able to get their pension payments paid to them without tax being levied at source and having to reclaim it, where they are no longer UK tax resident.

A Qrops in places like Malta can potentially pay benefits out Gross, assuming there is a working double taxation agreement with the country of tax residence of the client. Clients would, naturally, then need to declare this income in their country of tax residence.

For those not yet ready to move but are concerned about a future Labour Government and their plans to re-introduce the LTA, why not transfer what you have now and lock that outside of the UK and keep contributing to a UK pension?

With no effective LTA past 5 April 2023, why not take advantage and effectively protect your pension from any future changes?

Do you trust the government of the day not to change the rules again, or, that if Labour are elected, they won’t re-impose the LTA? And if they do, at what amount?

Unfortunately, history has a habit of repeating itself. What is important is to have an open and honest consultation with a suitably regulated adviser who really understands pensions and Qrops.

Qrops are not suitable or even necessary for everyone, but they still have an important part to play in pension planning, especially for those looking to retire abroad.

This article was written for International Adviser by Bethell Codrington, director of TMF International Pensions

While exclusions include pension rights (other than purchased annuities), a May 2019 binding ruling from Spain’s Directorate-General for Tax (DGT) concluded that non-EU pension plans do not qualify for the wealth tax exemption, stating ‘the consolidated rights and economic rights of pension plans established in non-EU Members States may not benefit from the exemption’.

This means that Spanish wealth tax now applies to a UK pension fund, from the point at which a member can take benefits, currently age 55. UK personal pension funds will be added to other worldwide assets to calculate tax liability each year.

This is a new development, and a client could try defending their pension plan with the Spanish tax authorities. Alternatively, consider a transfer of the funds into a Spanish or EU pension plan, such as an EU-based Qualifying Recognised Overseas Pension Scheme (Qrops).

A couple’s wealth tax exemption amounts to €2m, including main home relief. The state rates start at 0.2% for wealth up to €167,129 and rise progressively to 3.5% for wealth above roughly €10.7m (£9.43m, $11.7m), while each Spanish autonomous region has its own set of rates.

A possible means of reducing wealth tax for a Spanish resident is utilising the rule which says the cumulative wealth and income taxes cannot exceed 60% of the general and savings net taxable base amount. While this limitation is subject to a payment of a minimum of 20% of the full wealth tax calculation, some relatively simple tax planning can reduce assessable income, and in turn wealth tax liability.

You should beware of a further 2021 binding ruling from the DGT, which sets out that a pension deemed to not originate from Spain, or from within the EU, protected under the 2016 EU Pensions Directive, which is transferred to another scheme, is a transfer of a third country pension resulting in the entire value of the pension being taxable.

Therefore, the potential transfer of a UK scheme to an EU-based Qrops to avoid Spanish wealth tax would also avoid Spanish income tax on the transfer only if it occurs prior to the scheme holder acquiring tax residence in Spain.

This article was written for International Adviser by Jason Porter, director of expat financial planning firm Blevins Franks.

The clients allege they received negligent financial advice in 2014 which resulted in over £10m ($12.1m, €11.4m) being transferred from their employer pensions into “inappropriate” and “high-risk” qualifying recognised overseas pension schemes (Qrops).

The 62 investors were not originally given the ability to take legal action against Castle as the Qrops administrator, after a UK high court ruling in 2021 determined that the courts in England and Wales did not have jurisdiction on the matter.

But in October 2022, the investors, represented by High Street Solicitors, appealed the decision and had it overturned in November 2022.

Total losses are still being determined, but the 62 believe the minimum level is currently at £10,215,289.04 – the total sum transferred from defined benefit (DB) schemes into the Qrops. The investors are all from England, Northern Ireland and Scotland.

Castle Trust Management Services, part of the Castle Trust Group, will have until 25 January 2023 to file its defence.

Details

In 2014, the 62 investors were allegedly advised by IFA business Montegue Smythe to transfer, according to High Street Solicitors. But reportedly, the customers were not aware that the company wasn’t authorised by the Financial Conduct Authority (FCA) to provide financial advice on investments, pensions and pension transfers.

High Street Solicitors said once the transfers into the Qrops were made, the investors were allegedly advised to invest in unregulated collective investment schemes.

Sarah Kearney, director at High Street Solicitors, added: “This is an incredibly significant development in this case and we’re delighted that the high court has accepted our appeal and we can now move forward as planned with the case in the courts of England and Wales.

“We’re determined to hold these companies to account on behalf of our 62 claimants who deserve to be compensated for the losses of their pensions that they’d worked hard for many years, as well as the loss of the potential interest that could’ve been made had they been invested into suitable pension schemes.”

International Adviser contacted Castle Trust Group for comment, but the company did not reply in time for publication.

Such was the case with consultation outcome ‘Government response: The occupational and personal pension schemes (conditions for transfers) regulation 2021’.

It gives trustees and pension scheme managers the ability to stop or pause a transfer request if they identify ‘red’ and ‘amber’ flags.

Sensible, noble and long overdue.

But things start to unravel when you look at the wording – not just what is written, but what is not written.

Exemptions

Qualifying recognised overseas pension schemes (Qrops) formed a key part of the above consultation and response.

In March 2017, the UK government introduced a 25% overseas transfer charge (OTC) on retirement pots. There are carveouts, such as:

• Transfers to a jurisdiction in which the end client resides for at least five years: for example, an Australia Qrops for a Brit who is moving to Melbourne.
• If the transfer is within the confines of the European Economic Area (EEA): for example, a Malta Qrops for someone moving to Lichtenstein.

The consultation focused on what evidence should be required to prove that the end client actually resides in the country – be it Australia, Switzerland or any other eligible jurisdiction.

The document flits between the merits of mandating multiple documents to authenticate someone’s place of residence, versus unintentionally opening up avenues for scammers or creating a more complex and expensive system.

Ultimately, it concludes that “[…] the residency link will now align more closely with the exclusion from the OTC in section 244B of the Finance Act 2004”.

What about section C?

That is a simple enough statement – but one that potentially opens a can of worms, as Chris Lean, director at Aisa International, explains.

“Paragraph 60 of the DWP statement states that members that want to transfer to a Qrops will have to demonstrate their tax residency in the country in which the Qrops is established. The paragraph specifically refers to aligning closely with Section 244B of the Finance Act 2004. This section of the Act refers to Member and the Receiving Scheme being in the same country.

“The paragraph does not state that it aligns with Section 244C which refers to Member and Receiving Scheme in EEA States.

“Further, the guidance on the Pension Regulator’s own website for the ceding UK trustees states ‘[…] you must check that the member is tax resident in the same country that the receiving scheme is based’.”

International Adviser reached out to HM Revenue and Customs, where a spokesperson advised: “There has been no change in the OTC since outlined in March 2017.”

But Lean argues that the ambiguity in the wording is complicating matters and could stop legitimate transfers.

“How will ceding trustees interpret this when they receive transfer requests? While there are no obvious changes to the OTC rules, it all becomes irrelevant if a transfer is blocked in the first place.”

Clear as mud

Ambiguity is the breeding ground of scammers – and no friend to businesses and individuals working hard to remain on the right side of regulation.

The soaring cost of professional indemnity (PI) insurance and increased personal culpability under the senior managers and certification regime (SMCR) means that risk aversion isn’t just a hot topic for investors.

The cost of complaince means it’s easier, cheaper and safer for companies to say no.

Whether by error or design, HMRC has produced a document that makes it more difficult for businesses legitimately processing pension transfers to continue offering the service.

And there is still demand for Qrops. The taxman’s figures show that there were 3,000 transfers in 2020/21, down from 4,400 the previous year, although this is likely due to the pandemic.

Considering that the consultation and response were designed to ensure people retain the freedom to transfer their pension – it makes the situation incredibly ironic that it has also succeeded in making it more difficult.

Castle Trust & Management is a company registered in Gibraltar and operates as a professional trustee company. It is the trustee of two Qrops, which are also established in the Crown Dependency, namely the Equus Scheme and the Metro Scheme.

Each of the 62 claimants joined either one or both Qrops as a member and transferred existing “UK pension fund interests” into the relevant scheme, the high court was told.

The investors are divided between two groups: those who were advised on some unregulated investment schemes, and those who received advice on a single investment called ‘Elysian’.

Both Qrops were promoted by a Cypriot firm called Montegue Smythe which operated from an English address in Waterlooville, but was not authorised by the Financial Conduct Authority to conduct investment business in the UK.

Once the pension was transferred into the Qrops, Castle acted as the trustee and administrator of the scheme and “held the resulting sub-fund upon trust for the member”.

The 62 investors tried to bring the firm to court in England, as most of them reside in the UK, because they believed the unregulated investments were “entirely inappropriate for pension provision” and that many “investors’ accounts are in debit, eroded by the very high charges of [Castle]”, said McMeel, the barrister acting on behalf of the investors.

As a result, the claimants believed themselves to be victims of a pension scam.

Wrong jurisdiction

But Judge Russen threw the case out as he said that it could not be heard in the English courts.

This is because Castle is domiciled and incorporated in Gibraltar and, as such, the UK does not have any jurisdiction over it.

Although the 62 claimants tried to argue that there was an exception to the rule, the judge disagreed.

He said: “It is therefore clear in my judgment that any claim against Castle based upon non-performance of services would have to be based upon the deeds and the rules incorporated by them.”

He added that any claim against the firm would need to be filed with the Gibraltar court, as a result.

Russen found that the 62 investors had “not established a good arguable case that this court has jurisdiction over their claims against Castle”, and dismissed their case.