Tax relief given on pension savings reportedly costs the Treasury about £40 billion per year before taking into account income tax paid on benefits (around £20 billion). That cost may give some justification to the restrictions on what can be done with those savings and the tax charges for those who transgress. Although the trend has been to put greater restrictions on the inputs and give more flexibility in benefits, one area which remains difficult for trustees is transfers to overseas pension schemes.

Transfers generally are a concern for trustees because of the amounts which can now be involved and trustees properly being concerned to avoid scams. Administration procedures have been ramped up to ensure that the appropriate due diligence is carried out and any issues flagged to members. That necessarily takes time. For overseas transfers there is an additional problem – is the receiving scheme a Qualifying Recognised Overseas Pension Scheme (QROPS)?

A transfer is only an authorised payment under the Finance Act 2004 if the receiving scheme is a registered scheme in the UK or a QROPS if it is an overseas arrangement. A QROPS is a Recognised Overseas Pension Scheme (ROPS) which meets certain additional requirements including undertaking to notify HMRC if the scheme ceases to meet the conditions to be a ROPS.

HMRC publishes a list of ROPS but it specifically states that it does not guarantee that the schemes on the list are ROPS; they are merely schemes which have asked to be included in the list and transferring trustees need to satisfy themselves that the receiving scheme meets the requirements to be a ROPS or risk incurring charges for making an unauthorised payment.

Sadly, no amount of due diligence on behalf of the transferring trustees will be sufficient to determine conclusively that the receiving scheme is a ROPS. The trustees will have to rely on information from the receiving scheme but they cannot even rely on documentary evidence. HMRC’s Pensions Tax Manual states “If in respect of transferred funds the scheme does not act in accordance with its rules, or any law, prohibiting the payment of benefits before normal minimum pension age, the scheme will not meet the requirements of the ‘Pension Age Test’. Such a scheme cannot be a ROPS so cannot be a QROPS”.

It is not as if trustees will generally have discretion as to whether to make a transfer. If the member goes through the statutory process and makes his application to transfer within the relevant period, the member will acquire a right to transfer.

Read Max‘s article in Pensions Aspects.