In summary, a QROPS policyholder must now have been non UK resiedent for 10 full tax years in order to fully benefit from the tax adavnatages of QROPS schemes. In addition, scheme must now have the same tax treatment for income as the residents of the country in which the schemes are based. This has made schemes such as Guernsey based schems temporarily unattractive, although the Guernsey pension authorities are currentlylobbying hard with HMRC to try to resolve matters.

QROPS remains perfectly good advice and a very attractive solution in the right cicumstances for certain UK pension scheme holders, and offers many signifcant advantages over UK pension schemes.

The new QROPS rules should not be seen as a deterrent for those who have genuine intentions with regard to their UK pension schemes.

In essence, a QROPS scheme is effectively an offshore SIPP, but has significant advantages over SIPPs, including being able to take a higher amount of tax free cash and a higher level of income than that which is available under SIPPs.

Like SIPPs, it is possible to access a full range of investments under a QROPS, from all investment fund providers, and unlike SIPPs, these can be denominated in a range of currencies. Also, as is the case with SIPPs, benefits from a QROPS, whether they be tax free cash or income or both, can be taken at any time from age 55.

A major advantage of QROPS over SIPPs is that QROPS funds can be passed on free of tax to a member’s family on death, whereas under a SIPP there is a tax charge of 55% applied to any funds passed on upon the death of a member. This tax treatment makes QROPS a very favourable alternative to SIPPs and other UK based pension schemes.

In short, in the right circumstances, it is difficult to perceive any significant advantages to a UK expatriate or UK pension holder who is now living abroad to retain their benefits in a SIPP, as opposed to transferring to a QROPS.

As always though, proper advice from a professional qualified independent adviser should always be sought to ensure that the correct pension transfer advice is given.

The new rules, announced in draft regulations which are set to become effective from April 2012, were introduced to prevent ‘ scheme busting’ by offshore schemes , particularly New Zealand based QROPS schemes, whose aim was to extract 100% tax free cash from their offshore pension schemes.

Under the new QROPS rules, a schemes must use at least 70% of the transfer value into a QROPS scheme to provide the offshore pension, and a maximum of 30% of the QROPS transfer value can be used to provide a tax free cash sum of up to 30%.

Also the offshore pension cannot be paid at a different rate of tax to that of the local residents. For example, if a QROPS scheme is of Isle of Man jurisdiction, then the rate of income tax from the QRPS (currently 0%) cannot be different to that paid by local residents i.e. 20%. If there is a discrepancy in rates, then the offshore scheme will no longer be granted QROPS status, and will instead be siply a registered overseas pension scheme.

In addition, the period required for there to be no reporting requirement for a QROPS has been increased from 5 years of non UK residency to 10 years from the date of transfer.

The overall effect of these changes in QROPS legislation is that there are still very significant tax advantages to these very popular overseas pension schemes, and Anna Morris is of the opinion that QROPS scheme are very much here to stay:’ The new QROPS rules are a blueprint which will establish QROPS as the overseas pension of choice for the discerning expatriate client, and we envisage them being around in the offshore pension arena for a long time to come’.

The company’s UK pension scheme is deeply in deficit, and last year Kodak’s US parent company was forced to pledge to pump in £535 million over 10 years in order to make this good. As at the end of 2010, the UK pension scheme had a deficit of £442 million.

Now however there are fears that these payments could dry up if the parent company, Eastman Kodak, which has recently filed for bankruptcy, cannot make the payments, as is feared likely.

If the UK company, Kodak Ltd, also files for bankruptcy, then the final salary scheme will enter into the Pension Protection Fund (PPF). Having to prop up the Kodak pension scheme would be a major blow for the PPF, which is already stretched as other funds struggle to meet their commitments. This situation serves to highlight the problems facing final salary schemes, which are coming under increasing pressure, primarily due to increased longevity.

As many of the deferred members of the Kodak scheme are now based abroad, they may well consider transferrin g their benefits into the increasingly popular offshore pension schemes, QROPS (Qualifying Recognised Overseas Pension Scheme), which are HMRC approved, and offer significant tax advantages, in addition to removing concern as to whether final salary pension schemes will be able to honour their pension commitments. These offshore pension schemes are now so popular that they have already attracted over £800m in pension funds from the UK since their inception in 2006, and look set to be in the forefront of offshore pension planning for UK expatriates for many years to come.

The reason for this is twofold: firstly people are simply living longer: therefore as annuity rates are based around average life expectancy, then it follows that increased longevity results in reduced annuity rates.

Secondly, annuity rates are also based upon gilt yields. Currently UK gilt yields are at an all time historic low, with the UK 10 year gilt yield currently at 2.2%. This again has resulted in a reduction in gilt yields.

As an example, a pension fund of £100,000 would have now provides an annuity of £6,300 per annum for a ale age 6 on a single life, level basis. Around 15 years ago, this same £100,000 would have produced an annuity of around £9,000 per annum.

This is the negative news, now for the positive: it is no longer necessary to purchase an annuity in orer to provide an income from a pension fund. Indeed, under the highly tax advantageous QROPS schemes, there is no requirement to purchase an annuity at any stage, even after age 75. This means that it is possible to take income drawdown from a pension i.e. simply withdraw an income from the fund, whilst not having to pass the fund itself over to the annuity provider.

There are two major advantages to this: firstly the flexibility to vary income levels is retained i.e. you do not have to lock into an annuity rate which you cannot subsequently change, and which is at an all time low. Secondly, and perhaps most importantly,   the individual retains control of the pension fund, and under a ROPs scheme the whole of the fund can be passed on free of taxation to the policyholder’s family (whereas under a UK scheme this would be subject to a tax charge of 55%)

Therefore whilst the lowering of annuity rates is unfortunate for those who have purchased annuity recently, the good news for those with a U pension who are living abroad is that QROPS schemes now offer a very attractive alternative to having to lock in to low annuity rates.

The reasons for this increase are twofold. Firstly longevity has again increased, meaning that those guaranteed pensions are payable for a longer period, and are therefore more expensive to provide. In addition, increased longevity implies a significant increase in a schemes long term liabilities.

Secondly market volatility has meant that the assets of final salary pension schemes have fallen considerably, meaning that the gap between assets and liabilities I.e. the deficit, has increased.

If a final salary scheme is in deficit then it must agree a recovery plan to make good this deficit. This recovery plan cannot be for a period of more than 10 years. As any final salary scheme deficit must now appear on a company’s balance sheet as a trading loss, then companies are keen to remove or reduce deficits wherever possible. However, as companies have increasingly found profits and therefore cash flow increasingly difficult to achieve, it follows that their ability to reduce final salary scheme deficits has also reduced.

The greatest concern for members of final salary schemes is that their scheme becomes insolvent, and therefore unable to pay their members’ pensions. If this happens, then the scheme falls into the Pension Protection Fund (PPF), under which pensions not in payment are protected up to a maximum of £29,870 per annum. However, concerns have increasingly been expressed over the PPFs ability to meet future liabilities with regard to final salary pension schemes, if too many were to enter into PPF, as now appears more than likely.

As a result of the problems being encountered by final salary schemes, many more members are now questioning whether it is actually always in their interests to remain in these schemes, especially if they are living abroad, and therefore eligible to transfer into the highly tax efficient QROPS schemes. Whilst the guarantees offered by final salary pension schemes can never be overlooked (assuming they remain solvent), the additional advantages offered by QROPs schemes are now presenting a highly viable alternative, and are well worthy of consideration, provided that advice is provided by a fully qualified independent financial adviser.

Advantages such as being able to pass on a greater amount of pension to your family, income being able to be paid free of UK income tax, flexibility to vary income and the ability to take a much higher level of tax free cash are all reasons why a transfer into a QROPs scheme could be a viable alternative.

In principle final salary schemes should be the safest form of pension for the individual, as they offer a guaranteed pension at Normal Retirement Date, and moreover one that will usually increase in payment in line with inflation, and usually with an inbuilt guarantee of a widow/widower’s pension of 50 or 66% of the member’s pension.

However, in recent years more and more final salary schemes have encountered increasing levels of difficulty, to the point where more than two thirds of schemes are now in deficit, and more than two thirds also are now closed to new members, and to future accrual for existing members.

So, what has gone wrong? The simple answer to this is that people are living longer. When final salary schemes were first introduced, the expectation was that benefits would be paid, without any inflation linked increases, for maybe 6-7 years from a members’ Normal Retirement Age. However, fast forward 30 years, and this expectation has now become 20-25 years, with inbuilt escalation of benefits which can more than double the original starting pension.

This in turn has increased massively the long term liabilities of a typical final salary pension scheme. Allied to this is the relatively poor stockmarket returns over the past decade (and pension schemes have to invest their funds in the same way that individuals do) and the end result is that schemes that 10 years ago enjoyed a healthy surplus are now heavily in deficit.

In this event, scheme deficits represent a serious problem for the sponsoring employer in two ways: firstly any deficit has to appear on the balance sheet as a trading loss, which can seriously skew a company’s profit and loss figures. Secondly the employer must agree a recovery plan, which can be a maximum of 10 years, to redress any deficit. Particularly in these troubled economic times, it is easy to see how a final salary scheme can now quickly become a considerable inconvenience to any employer which they would prefer not to have.

And of course the obvious question is what happens to a scheme when the employer is unable to make good the deficit its’ final salary scheme has built up, simply because it does not have the resources to do so? The answer is one of two things: either benefits payable to members have to be reduced, or in extremis the scheme enters into the Pension Protection Fund. Either of these eventualities is a highly unpalatable solution for the member, who has been prudently building up a pension benefit for a number of years that they perceived to be entirely safe.

As a consequence of this, the concept of being able to transfer away from final salary schemes, in favour of schemes such as QROPS, which also carry significant tax advantages, has become an increasingly attractive and relevant one over recent years, as it enables the scheme member to regain a control of their pension fund which can appear to be worryingly beyond them. The next article will examine in detail the particular merits that this course of action can offer.

However, whilst potentially attractive for employees, they have in recent years become anything but for employers, as due to increased longevity and troubled investment markets, the vast majority of schemes have become heavily in deficit, as scheme assets have increasingly fallen below the higher levels of liability being brought about by an ever increasing number of pensions in payment.

As a result of this many companies have now closed their final salary schemes completely, as they do not want to incur increasing pension deficits, which it is then incumbent upon them to make additional payments to remove. For many companies, final salary schemes have now become an open cheque book they simply cannot afford to maintain.

To this end many companies are now prepared to offer higher transfer values in order to encourage employees to transfer out of schemes, thereby reducing long term liabilities. In addition many scheme members have well placed concerns with regard to a scheme’s ability to remain solvent, and therefore to be able to make the payments promised to their members.

Taking advantage of final salary scheme transfers is particularly attractive currently, as transfer values are relatively high, due to gilt yields being very low. In addition many scheme members now prefer the control and flexibility offered by pension schemes such as QROPS schemes.

The question of whether or not to transfer away from final salary scheme, particularly when there is the availability of tax advantaged QROPS schemes for UK expatriates, is a potentially complex one as there are many different factors to take into account. The guarantees offered by a final salary scheme must be weighed against greater tax efficiency, greater flexibility, and whether the scheme concerned is heavily in deficit to the extent where its solvency is in question.

There is never a clear cut right or wrong answer, but what is required is a detailed analysis of each situation, in order that an individual is able to make an informed decision, based upon an awareness of all relevant facts.

Rochester International is able to provide professionally qualified advice so as to ensure that the appropriate decision is taken.

The basis of the new 50C legislation is that 70% of the transfer value into a QROPS scheme must be used to provide an income in retirement. What this means is that 30% of the transfer value can be used to provide a tax free cash lump sum.

However what it also means is that 100% of any growth can also be used to provide a tax free lump sum, thereby enabling a member of a QROPS pension scheme to extract a potentially massively higher amount of tax free cash than that which would be available from a UK pension scheme.

To give a numerical example of this, if a SIPP or a Personal Pension in the UK had a value of £200,000, and this grew to £400,000 over 5 years, the maximum tax free cash that could be taken would be £100,000.

If the fund of £200,000 was transferred into a QROPS scheme, and this grew to £400,000, then the maximum tax free cash that could be taken would be £60,000 (i.e.30% of the transfer value) plus 100% of the growth (i.e. £200,000) This would then give a total maximum tax free cash amount of £260,000. Therefore the increase in tax free cash available would be £160,000 under a QROPS scheme.

Initially there was speculation as to whether HMRC would allow this loophole to be permitted, but there are now Isle of Man based QROPS schemes which have received confirmation from HMRC that this is acceptable.

Given the many other potential advantages of a QROPS scheme, this is an additional reason why those UK expatriates who have a UK based pension fund (e.g. a SIPP, personal pension or final salary scheme) should give very serious consideration to transferring their pension into a QROPS pension scheme.

However advice should be received from an adviser who is appropriately professionally qualified, and anybody considering a QROPS transfer should ensure that their adviser holds an appropriate pension qualification, such as the G60 paper, and preferably that they are a Chartered Financial Planner.

While the move is expensive – finance companies charge high fees to transfer funds – it is increasingly seen as worthwhile for those with huge pension pots.

After the five year period it is also possible under some schemes to convert the funds into cash.

The growing number of wealthy pensioners taking up the scheme is proving embarrassing to the government as it is also likely to lose the exchequer millions of pounds in revenue.

The government admitted it had approved hundreds of applications from financial advisers to take their client’s retirement funds offshore under the scheme known as the Qualifying Recognised Overseas Pensions Scheme (QROPS advice), first introduced in April 2006.

Pension plans in the Isle of Man, Guernsey and Jersey appear on an approved list of destinations for UK pension transfers, alongside Switzerland, Australia and New Zealand.

Ros Altmann, an independent pensions consultant, said that the pension rule change at first appeared to have limited impact on the exchequer, but it was rapidly becoming widespread and potentially costing millions of pounds in lost taxes. She said inheritance tax revenues could also be hit.

“The loss of tax to wealthy non-domiciles will seem like a sideshow compared to the tax losses on rich peoples’ pensions,” she said.

MPs accused the government of allowing rich retirees to enjoy extra benefits at a time when most workers face a “pensions crisis” and are preparing for steep falls in income when they reach retirement.

Lord Oakeshott, Liberal Democrat Treasury spokesman, said: “The Treasury must stamp out this now. When you have pumped up your pension pot with top-rate tax relief you can’t then cheat the taxpayer by sailing off into a tax haven sunset to draw your pension.”

A spokesman said HM Revenue & Customs (HMRC) would monitor foreign jurisdictions to make sure they complied with basic UK pension rules and were no more attractive, from a tax position, than remaining in the UK.

It is estimated that there will be 12.2 million pensioners in the UK by 2010, with 9.8% retiring overseas. The total number of pensioners will rise to 17.5 million by 2050, with 3.3 million or 19% set to retire abroad.