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Guernsey’s Pension Dilemma
Are we about to see a repeat of 1446 BC, but this time the exodus of Guernsey Pension Scheme members? Bethell Codrington explains
There is a Billet d’Etat due to be discussed at the next Guernsey States meeting on 29 September on whether to introduce Flexible Drawdown, and if approved, the legislation would be effective from 2 October 2015. The legislation to be discussed is: where transferred-in funds from certain overseas pension schemes (including the UK) can be separately identified, will those funds be able to be paid out with the same flexibility allowed by the laws of the jurisdiction that the funds were transferred from.
Simply put, Guernsey is seeing a large number of requests to transfer out of their de-registered QROPS (RNUPS), with clients wanting to avail themselves of the new flexible rules. To date, this means either transferring back to the UK or Malta, so by potentially bringing in this legislation they hope to ‘stem the flow’.
Those over 55 will probably take their pension pots, as there is no withholding tax in Guernsey, no DTAs to talk of, and little incentive to stay. With average pension fund sizes in the tens of thousands it is quite probable the over 55 age group will exit, leaving those pre-retirement behind.
Sting in the tail
The UK Statutory Instruments state that as Guernsey is not in the EEA this means that pension schemes will need to have the 30% Cash Commutation and 70% reserved to pay income for life restriction or they will lose their Overseas Pension Scheme (OPS) status. This would mean that on death for a UK Domicile based anywhere in the world, or a UK resident, the fund would be subject to tax at 40%. The UK Revenue would need to change the definition of an OPS to get around this problem.
The perfect storm:
1) Do nothing and watch the closed book of business flow away.
2) Do something and watch the over 55 membership haemorrhage and the pre 55 transfer out due to the lack of IHT protection.
3) Clients with larger pensions, who do not want to participate in Flexible Drawdown, end up paying tax on encashment and then 40% IHT on subsequent death.
As Pension Funds are still NOT a ‘Regulated Activity’ in Guernsey, it is difficult to see why clients and their advisors (with a few exceptions) would wish to retain a Guernsey Pension Scheme.
Finally QNUPS. Anyone thinking that their other pension funds in Guernsey are protected from IHT, will have a nasty shock.
Malta for a lot of clients will be the perfect alternative with its ability to offer Flexible Drawdown, being compliant with all UK Statutory Instruments, and a wide range of Double Tax Treaties, reinforcing its reputation as the “Jurisdiction of Choice.”