In 2014, the UK government announced reforms that were described by some as a pensions ‘revolution’. Those reforms introduced ‘flexible drawdown’, relaxing long-standing restrictions on how, and from what age, pension savers could access their pension pots – meaning that retirees would no longer be forced to buy an annuity to fund their pensions which, in depressed economic times, often produced relatively poor returns for a lifetime’s saving.
The first phase of ‘flexible drawdown’ saw a reduction in size of the pension pot a retiree with a defined contribution pension needed before being entitled to draw a lump sum proportion. A year on, the 2015 UK budget saw the abolition of restrictions on what proportion could be taken as a lump sum, and, as an alternative to the annuity option, the choice of a freely accessible drawdown contract.
While not so fundamental, Jersey has seen similar reforms to its domestic pensions regime. Jersey’s pensions legislation is principally built into its primary tax legislation, the Income Tax (Jersey) Law 1961. In September 2014, an amendment to that law was passed paving the way for implementation of, among other pension-based reforms, the following changes:
- The existing 30 per cent limit on tax-free lump sum withdrawals was retained – pensioners, however, have been given greater flexibility in the number of tranches by which that 30 per cent lump sum entitlement may be drawn.
- The requirement that a person of retirement age retires before drawing a pension no longer applies.
- And pension savers are now allowed to enter into a drawdown contract – attractive to those not wishing to secure their pension by way of an annuity – even if they have already received a tax-free lump sum from their pre-existing occupational pension scheme.
As well as introducing domestic reforms, the amendment to Jersey’s tax legislation opened opportunities for Jersey’s international pensions offering, particularly in relation to Qualifying Recognised Overseas Pension Schemes (QROPS).
The UK’s QROPS regime enables accrued benefits in a UK pension to be transferred to a non-UK based scheme – where a UK employee is moving overseas, for example – without losing the tax breaks which HMRC affords to UK-registered pension plans. For a QROPS scheme to be ‘recognised’ it has to meet certain criteria laid down by HMRC.
Other international finance jurisdictions, Guernsey included, stole a march on Jersey with regard to accessing the ‘third-country QROPS’ market. In response, Jersey QROPS legislation was lodged for approval by the States in 2012. However, events intervened, as, around the same time, and in response to what it perceived as abuse of the QROPS regime, HMRC de-listed a swathe of self-certified QROPS schemes established in various jurisdictions, including Guernsey.
The third-country QROPS market survived nonetheless, and these latest amendments to Jersey’s pensions law may provide a shot in the arm for Jersey’s own QROPS offering.
The UK rules do not require a QROPS to be established in an individual’s new country of residence – so a QROP established in, say, Guernsey, could be used by a person moving from the UK to the other side of the world. Historically, however, Jersey QROPS were only permitted for Jersey residents. The recent changes to pensions law now allow Jersey residents to transfer their pensions to ‘equivalent’ schemes in other jurisdictions. A corollary to that is the ability for local service providers to now offer Jersey QROPS to non-Jersey residents, removing a significant impediment to promotion of Jersey as a QROPS-friendly jurisdiction.
The recent introduction of flexible drawdown in the UK from April 2015 also has implications for QROPS offerings in Jersey and elsewhere. Whether that will be positive is unclear. It remains somewhat uncertain whether or not HMRC’s principle that overseas scheme rules should mirror those in the UK will mean that QROPS will have to afford flexible drawdown with a similar age cap on accessing pension funds. For a number of jurisdictions offering QROPS, this would mean raising the current age limit provided for by their own legislation.
Certain jurisdictions, such as Malta, have already made legislative moves to align their pension regimes with those changes to the UK rules, and it may be that Jersey will have to follow suit.
Contact: Mason Birbeck
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