Following HM Revenue & Customs’ (HMRC) crackdown on qualifying recognised overseas pension schemes (QROPS) in April, the department removed all five of Cyprus’s QROPS from the HMRC list of approved schemes earlier this month but has not explained why.
Pension income paid from a Cypriot QROPS is taxed at only five percent with thirty percent available as a tax-free lump sum.
The department launched QROPS in 2006 but has recently been cracking down on jurisdictions amid fears that many are failing for meet the recently established tax relief test, which states that a jurisdiction must charge income tax on pension payments at the same level for both residents and non-residents. For example, in April Guernsey lost 300 QROPS after HMRC implemented this rule.
Some experts believe that Cyprus QROPS may have breeched the part of the test that says: “Where tax relief in respect of benefits paid from the overseas pension scheme is available to members of the scheme who are not resident in the country or territory in which the scheme is established, the same or substantially the same tax relief must… also be available to members of the scheme who are resident in the country or territory.”
However, others think that Cyprus as a jurisdiction has come into the department’s sights following some Guernsey based QROPS contemplating Cyprus as their new home.
Another reason might be that Cyprus does not have an official pension regulatory body, so the taxman may have taken the decision in a bid to protect anyone contemplating using the jurisdiction for the investment of their pension funds.
As a firm we’ve never recommended QROPS in view of the high risks involved. However a simple UK pension scheme remains a great way to save tax efficiently for your retirement. With tax savings at your highest rate of tax (eg 40%,50%) on contributions of up to £50,000 pa (more for some clients) the possible tax savings continue to be substantial.
If you’re concerned about what the QROPS crackdown which has been launched by HMRC may mean for your pensions, or if you want to discuss future pensions, contact the team at Milsted Langdon.
Steve Horton is a Chartered Accountant and a Chartered Financial Planner who specialises in helping clients to manage their pensions and investments