There is an ongoing debate on where the global economy is heading with one camp saying that low interest rates and quantitative easing will cause a period of higher inflation. Whilst the other camp believe that the lack of demand, excess capacity and the lack of liquidity will all lead to a period of deflation similar to Japan.
With the global economy appearing to slowdown, commodity prices starting to correct and the banking sector still looking fragile it seems as though the latter may have the correct prognosis. So what of it what should we do? Well here are what we consider to be the best investment ideas in a deflationary environment:
Whilst we appreciate that there isn’t an enormous amount to be made in cash and that interest rates are at an all time low our outlook has to change in a deflationary environment. When asset prices are falling even if we are receiving 0% interest in cash then we are actually making money as the purchasing power of our cash is actually increasing.
Revising our growth expectations is essential making sure that we have a higher degree of liquidity during such conditions could increase your wealth significantly.
Paying down debt during periods of deflation is also a good though it may not appear to be an investment as such it really is. As we saw earlier the value of money increases during deflationary times as does the value of debt so clearing it off again means that you are significantly adding to your wealth.
Bonds provide a solid alternative to cash and whilst yields may fall there should be some appreciation in the asset price. Government treasuries are a preference as corporate bonds could run into difficulties.
Another alternative would be to use managed bond fund that doesn’t allocate on an index basis. One great example of this is Stratton Street Capital’s Wealthy Nations Bond Fund that allocates on a global basis taking into account a debtor’s ability to pay and allocating to the most solvent nations.
During deflation asset prices fall this would certainly apply to equities, property and commodities which, could all experience periods of sustained losses. Investing in assets that can take advantage of these falls could provide a real opportunity for growth through shorting (selling the asset before you own it and then buying it back at the lower price for a profit).
Taking short positions yourself can prove to be expensive and complicated we would therefore recommending finding an alternative route. The advent of Exchange Traded Funds (ETF’s) means that most indices and commodities can be shorted. Another way would to use a good Managed Futures Program that employs an established Commodity Trading Adviser (CTA) that will trade most sectors taking short positions when asset prices are falling.
Both of these options provide a highly liquid way of investing and benefiting from falling asset prices though the former is passive and the latter a much more active form of investing.
5. Dividend Yielding Stocks
Whilst shares are probably in for a tough time in a deflationary environment high dividend yielding stocks may be an exception to this rule. For starters the dividend yield would prove to be a welcome return on investment at a time when pickings could be very slim.
Whilst this doesn’t mean that values can’t fall, if you are looking at market leaders they may be able to maintain there competitive edge whilst other companies succumb to thinner and thinner margins.
Sectors that performed the best in Japan’s deflationary period have been technology, healthcare and telecoms. Another area that could be worth considering are large companies that make household consumer items the fast moving nature of this market means that they can take advantage of pricing trends much more efficiently than companies that have a longer sales cycle.
All in all it is important that we revise growth expectations in such a period when getting no return could mean that your money is actually growing as your purchasing power increases.
So we’ve already established that whilst a Greek default may be on the cards giving up the euro may not be, though what if they did? What would this mean for the rest of the Eurozone?
The real answer is nobody knows though there is several scenarios depending on how friendly a Greek exit from the euro ended up.
So Greece leaves the Eurozone everything is amicable, member states provide support for the Greek banks and in return the Greeks offer a managed solution to the debt default with the member states.
The losses incurred by the other European economies are manageable, decisive support from the ECB brings stability and confidence. Structural economic reform in the member states and strong support from Germany means that investors return to the European markets resulting in sustainable growth.
The other side of the coin is very different and goes something like this. Greece defaults which sucks capital out of the European banking system. This in turn means that bank lending and credit dries up resulting in a further slowdown of the European economy.
Cross border lending could seize up, as contracts would have to be renegotiated into drachma, which could prove to be complicated and contentious. The fact that any provision for a country leaving the euro is nonexistent would mean that any legal recourse could take 10 years. So why bother taking the risk which means a further slowdown in the economy.
Add to this a general lack of confidence from the public after Greek investors lost 50% of their savings. People in Portugal, Italy, Spain and Ireland start to transfer their Euro savings into Germany to protect against the risk of devaluation. Even though the politicians are saying that this wouldn’t happen only a few months before they were saying the same thing about Greece and at the end of the day interest rates are the same in Germany as they are in the other less attractive Eurozone states.
(NB: Whilst deposits from the member states would revert back to the original currency of the country should the euro collapse, it is still very uncertain what would happen with euro deposits held outside the Eurozone.)
This could certainly lead to fiscal unity within the Eurozone with bonds issued centrally by the ECB rather than member states. This would probably be extremely unpopular though may prove to be necessary if Germany decides that they have more to lose from a euro break up.
This would result in a collapse in the banking system in these states that could have far reaching effect on the global economy let alone the rest of Europe.
There are numerous outcomes to the whole scenario and nobody knows where the chips will land but one thing is for sure is that nerve will be tested as a game of what amounts to economic chicken unfolds over the summer months.
We don’t just mean in terms of currency strength, we want to understand what would be the implications of a country leaving the fold or even a complete break up (how likely is this?) and what would happen to those left holding the currency.
People seem to think that the likelihood of Greece leaving the Euro within the next 18 months is pretty high. Just how likely is this in reality and what would it involve?
Well it seems that Greece can’t be kicked out of the Euro or the EU for that matter whatever happens. They could negotiate their exit from the Euro should they decide that this was the best course of action though some say that it would lead to even more turmoil for the Greek economy.
Essentially what would happen is the exit would be announced, then all Y coded euro notes and Greek deposits would be converted into new drachma, which would subsequently devalue by at least 50% against the euro.
This would involve notes being stamped with drachma initially and eventually being replaced by new notes taking as long as 12 months to complete. The Y coded notes would not be legal tender or exchangeable for Euros in the rest of the Eurozone.
It would be almost impossible to implement without introducing capital controls aimed at stopping Greek citizens and businesses from taking their euro’s out of the country to avoid certain devaluation.
Market restrictions could also be a possibility as investors in Greek shares would more than likely want to sell them due to the currency devaluation. This would result in massive market falls so some intervention here may have to occur.
The Greek government would still have debt in euro’s owed to other member states, the IMF (International Monetary Fund) and the European Central Bank (ECB) which would have effectively doubled. This would certainly make default a possibility and renegotiation of loans and absolute certainty.
This would cause problems for Greek companies also as any foreign debts that they owed would effectively increase placing additional financial stress on them.
The Greek banking system would encounter enormous turmoil and banks may have to be closed. If other EU member states withdraw their support for Greek banks the economy could completely implode. So it would be likely that some form of support would continue.
Even with this continued support there would still be massive challenges importers would not offer credit and goods would have to be paid for upfront in hard currency. This may lead to food, energy and shortages of other utilities that could lead to panic and civil unrest.
On the plus side the resulting devaluation from the reintroduction of the drachma would mean that the Greek economy would become much more competitive. Greek exports would become cheaper and the tourist industry (that makes up 15% of GDP) would receive a much needed boost assuming civil unrest doesn’t have the reverse effect. Also foreign companies may be attracted if the devaluation results in reduced labour and real estate costs.
So withdrawal from the euro may not be as likely as everyone thinks and the party that are leading the poles are advocating rejecting the austerity package whilst remaining in the Euro.
Whilst some say that this is not a possibility and that the ECB would withdraw support for the Greek banks resulting in their collapse if Greece were to default.
Others say that if California were to have similar issues then it would not be expelled from the dollar on the contrary the other states along with the Federal Reserve would provide support until the issue was resolved. Anything less than this level of support would raise some major question over the validity of the Euro as a serious currency.
Having said this the Eurozone is not the United States in the sense that there is not the same national identity and patriotism that makes the dollar work.
So it would appear that Her Majesties Revenue & Customs (HMRC) were gunning for Guernsey after all with the revised QROP legislation. That makes it two down (Isle of Man & Guernsey) and how many to go? Well we don’t know the answer to that though we think the future for QROPS will have more changes.
After what appeared to be a tit for tat battle between Guernsey and HMRC the UK tax authority had the last say as it quite often does. As previous posts highlighted the changes had proposed that residents and non-residents within a jurisdiction should be subject to the same tax treatment on pension schemes. This was clearly not the case in Guernsey, so the channel island centre questioned the intent of this revision and when answers where either unclear or not forthcoming they decided to issue a preemptive strike by revising the pension legislation within the jurisdiction. A new pension class for Guernsey was created which attracted no tax relief on contributions though it provided benefits tax-free on drawdown, Crisis averted, problem solved!
Or so they thought and it would appear that they underestimated the shear will and ability of HMRC to get their own way come what may. What followed was a display of this with HMRC using discretionary power to remove the vast majority of Guernsey schemes from the revised list of approved QROP providers simply because they had reservations over the legislation that Guernsey had introduced. Guernsey was the biggest QROPS centre and HMRC were not happy about the amount of pension money leaking out so it would appear that they have got what they wanted one less jurisdiction to worry about and for the time being a reduction in the pension funds haemorrhaging out of UK schemes.
The good news for those who have moved their UK pensions to Guernsey under previously approved schemes is that there is no impact to them and the day to day running will continue as they were. It does mean though that as things stand then there will be no more pension transfers from UK schemes under QROPS legislation to a Guernsey based scheme.
So is this the end of QROPS? Far from it, as it would appear that the next port of call for the QROPS industry is Malta. Some providers have been more prepared than others and had set up alternative arrangements already whilst others are scrambling to get things set up.
Gibraltar may also be a jurisdiction, which starts to garner popularity though it would appear that Malta has the upper hand at the moment. One thing is for sure is that with QROPS essential being a European Union initiative Malta being a member state will make it much more difficult for HMRC to close down as they have done with Isle of Man and Guernsey.
Though never say Never!
Whilst stock markets have had a positive start to the year the same issues are still hanging around with resolution seeming a long way off. The US debt keeps growing, euro crisis lurches from one rescue plan to another and slowing growth could all nip this rally in the bud. In addition interest rates at close to zero offer little resistance to the burst of inflation that has been fueled by higher asset prices. So what can we do?
Well one option could be a structured product. These are investments which have an underlying asset that provides the growth element mixed with some kind of capital guarantee for the return of all or a proportion of capital irrespective of the investment performance. Structured notes can come in many shapes and sizes offering differing degrees of capital protection, infinite choices of underlying assets and various levels of growth potential. Here are two very different options that we found interesting and thought we would share.
Quantum Plus 8 from Standard Bank
This is a structured product which has two distinct parts to it the Quantum element and the Plus component each of which receives a 50% asset allocation from the amount invested.
Quantum is a 1 year term deposit which returns capital and interest at the end of this time. The Annual Equivalent Rate (AER) depends on the investment currency (US dollar, Euro & Sterling 4%, Australian dollar 10% & South African rand 15%) though they do offer an extremely competitive rate in each currency.
The plus portion of the investment is placed into a market index which is determined by the initial currency choice for a period of five years. At the end of this time initial capital is returned along with either 60% of the market performance or a 5% bonus (0.98% AER) whichever is the greater of the two. The investment indices are as follows:
|Euro STOXX 50
|S&P ASX 200
|S&P BRIC 40
||US dollar & South African rand
The US dollar is the only currency which provides a choice of index between the large cap more diversified S&P 500 or the emerging market option of the S&P BRIC 40 (Brazil, Russia, India & China). The most interesting element for the cautious investor is the fact that it provides a minimum return even if markets don’t perform equivalent to keeping the money in the bank.
Qantum Plus 8 is available for subscription until 12th May 2012 with the investment start date of 24th May 2012. The quantum deposit matures on 24th May 2013 and the plus ends 24th May 2017 with a maturity date 0f 31st May 2017.
Athena Guaranteed Series 2 Ltd from Man Investments
Athena is the original capital guaranteed structured product launched by Man Investments back in 1990. There have been many other structured products over the years since then from Man Investments and to celebrate the 25th year of AHL they have decided to launch a second series of this investment icon.
The original note has returned on average 12.8% pa over the past 21 years and a total return over that time of 1163.7%. Between 1st July 2007 and 28th February 2009 Athena returned an impressive 26.1% as opposed to world stocks which delivered a loss of around -49%. This time around the capital guarantee is provided by UBS which is 100% of capital invested at maturity on 27th November 2023. Athena can be sold prior to this time though the capital guarantee will not apply and current market value will be received.
Athena has an impressive investment pedigree through periods of economic prosperity and hardship and whilst it may not appeal to the more conservative investor it certainly should to those looking for excellent growth potential with limited risk.
Athena is available until 23rd April 2012.
Both of the above can be accessed directly or through Life Company Portfolio Bonds and if you require further information please feel free to contact us.
Figures for Athena Guaranteed provided by Man Investments.
I am about halfway through “The Trouble with Markets” by Roger Bootle which I must say is a very enlightening read and one that I thoroughly recommend.
One very interesting fact that I’ve gleaned from this book is that since 1800 Greece has been in a state of default for 50% of the time. So it is hardly unreasonable to assume that this situation was going to arise again at some point in the near future and if you had placed this bet with a bookmaker then you would have probably got short odds. So how did the international banking community come to the conclusion that it made sense to lend money to Greece at the exact same rate that it did to Germany and France?
Following on from news of the latest bailout I read this interesting article from Roger Bootle and thought that I would share it with you:
Please let us have your comments we’d love to hear from you.
Make sure your plan is set up on an “Underwritten” rather than “Moratorium” basis:
So what does this mean?
Well simply put if you are setting up your plan on an underwritten basis you declare your medical history (as you should always do) in as much detail as possible. The insurance company then considers this in detail and then if there are any conditions that need to be applied to the plan such as exclusions or loadings for pre-existing conditions you will be informed. You will then need to accept these conditions for the policy to become active which means that you know exactly where you stand and what you are covered for and what you’re not.
On the other hand coverage that is set up on a moratorium basis has a similar initial process which is you complete the application and declare your full medical history. This time the insurance company sets your cover up immediately without any comment on your medical history. The issue is that when you come to claim for treatment then the claim can be denied due to a preexisting condition, which is the only time that you would be aware of this situation. This can lead to some very stressful moments especially if you are being admitted as an inpatient and discover you have to foot the bill.
In our opinion setting up your coverage on a moratorium basis can lead to a great deal of disappointment and just because the insurance company doesn’t raise any questions there are no exclusions to the coverage. We feel that it is better to know upfront exactly what you are covered for so always request that the cover be established on an underwritten basis and establishing cover on this basis means that you will be made aware beforehand. If the company that you are looking to use only provides cover on a moratorium basis then find another provider.
Geographical Area of Coverage:
Most international plans have some restrictions on the area of coverage, whether that comes in the form of limited coverage in a particular jurisdiction or a complete exclusion. Therefore it is important that you understand what these are and how they apply to you. For example if you go on holiday every year to Florida and your policy provides no coverage in the United States, Canada and the Caribbean then you are exposed every time that you go on holiday. You should consider amending the plan if possible, changing to an alternate provider or taking out a travel insurance that will bridge the gap.
Generally the biggest exclusion is with the United States, Canada and the Caribbean, though there are some others that can result in a bigger excess payment or higher premiums. Some insurers may not allow coverage once you have repatriated to your home country which can cause issues if you have developed a condition that would not be covered by a new insurer should you have to find one.
The portability and jurisdiction of coverage can be extremely important so think about what you need and then check that your policy does exactly what you want.
Complications of Pregnancy Definitions:
If you are looking to start a family and are searching for a policy that will provide coverage for the expenses then one important area to consider is how the insurer defines complications of pregnancy. This may seem to be a small matter yet it is an area that can make an enormous difference to a family.
Some insurers will only provide treatment to the expectant mother should the pregnancy encounter complications. This means that no attempt to treat or save the unborn fetus will be made and the costs that will be covered will be for the mother and the termination of the pregnancy.
Other providers will provide treatment for mother and unborn child should the situation require. This is a big difference for any couple that is looking to start or extend their family.
Make sure you ask your provider for the definitions of complications of pregnancy and if you are still unclear ask questions on how these would be applied in specific scenarios.
Congenital Condition Cover or Automatic Acceptance of New Born Babies:
Following on with the pregnancy theme this is another important factor that most people understandably don’t consider and can cause an enormous amount of stress.
If a baby is born with a congenital condition such as “Down Syndrome” for example then the health insurer may provide coverage under a new born benefit for a limited period of time (i.e. as specified by the individual policy) this may be 30, 60 or 90 days. After this time unless there is a congenital cover or automatic acceptance of the new born benefit the insurance company will more than likely refuse to accept the baby onto the policy and therefore provide no further coverage.
The issue then becomes finding an insurer who will accept the baby, which is almost impossible to do from a private sector provider. At this point the only alternative would be to look towards a state provider though with the exception of the French system I am unaware of any other state scheme that provides coverage for their nationals living overseas. Usually congenital disorders mean regular visits to the doctors and big medical bills.
If this is something that concerns you and it certainly should be considered for older couples thinking about having children and couples who are aware that they have a history of congenital disorders in their family then you need to look closely at your health insurance policy.
The good news is that there are some policies that provide for this eventuality and will either provide a lifetime limit for the baby or automatically accept the baby onto the policy providing that the application is made within a certain time frame without exclusions. The bad news is that these types of policy tend to be the higher end of the market and thus have higher premiums. Having said this what you will save in the long run would be substantial and certainly make life much easier and secure.
Direct Settlement of Claims:
This may seem like an obvious one and I am sure that it applies to most international policies these days but direct settlement of inpatient claims is essential. If you have to foot the bill first and then claim it back after you have been admitted to hospital then you seriously need to consider changing providers.
Most international providers have a reclaim policy for outpatient and GP visits and this is OK, as these expenses tend to be relatively small compared to inpatient procedures.
The general procedure with most policies is that if you know that you need to be admitted to hospital then contact your provider and get them to pre-approve everything with the facility before hand. If you admitted with a medical emergency then the provider will have a 24-hour line that the hospital can contact so that they can approve the treatment. Some health insurers will have pre-approved medical facilities that they deal with and this can make the process even smoother though it can also limit choice.
Another option that involves you financing things first is not an option at all.
If you are going to retire overseas then in most cases depending on where you retire you will more than likely need some form of health insurance.
Any expatriate who has worked overseas for a number of years and intends to stay overseas when they retire will probably have enjoyed coverage under a company scheme. Assuming that this has been a happy experience and you’ve been provided with comprehensive coverage then the first piece of advice would be to check with the employer and the provider whether you can stay with the scheme and cover your own premiums.
There are two benefits to doing this firstly, any preexisting conditions that you may have developed over your time with the company and the scheme will still be covered whereas they wouldn’t if you established a new policy with the same provider or another insurer. Secondly, premiums on group schemes tend to be lower than those for individual applicants due to economies of scale from having more members under a single plan.
Let us assume that this is not possible or you are retiring overseas after working in your home country and you don’t have access to an international corporate healthcare plan then there are certain things that you need to be aware of.
Firstly if you have any preexisting conditions the likelihood is that you are going to have to foot the bill for any medical expenses relating to these yourself. Secondly make check the age of admittance for a provider whilst some have no age barrier to entry others will have an age limit for new applicants of 64. Next check on the age limit for coverage, again some providers will continue to provide benefits indefinitely whilst others can have an upper age limit.
Finally if you have set up a plan before you retired and increased the excess level so premiums remained low be aware that any preexisting condition that occurred whilst the plan has been established will more than likely be subject to the higher excess level.
If you are looking to provide cover for your family whilst you are overseas then you need to check which provider offers you the best coverage options and provides you with the best value for your kids.
Again plans vary a great deal and are designed to cater towards different sectors of the market. Some providers offer little if any discounts for children and these can be quite expensive for a family. Others will offer reduced rates for children below 18 and further discounts for each child up to a maximum discount for three kids. Others offer free coverage below the age of 11 for a maximum number of three children and then reduced rates from 11 to 18.
Choose An Excess That Suites Your Needs:
Most policies and certainly all policies that cover outpatient costs will have an excess on the policy. This will have different forms and may be on a per claim basis, it could be an annual amount that once surpassed claims will be made or an annual amount on outpatient claims only. Whichever form it takes you will need to pay so much towards some of your medical expenses.
If you decide that you are prepared to pay more towards your healthcare bills and self insure for the small stuff then your premium will reduce the more you are prepared to pay the cheaper the premiums get. This can get quite expensive especially with a per-claim excess and you could end up regretting it.
The level of excess that you are prepared to take is very subjective, individual views differ greatly and there is no right or wrong answer. Personally I prefer minimum excess and claim because generally health insurance doesn’t have a no-claims bonus.
Before you set up your plan think about what you want and can afford and decide how much excess you are prepared to take.
Make Sure That You Are Not Paying For Options That You Don’t Need:
Lets say you want to have routine dental covered on your health Insurance for your two kids, wife and yourself this could mean that you also end up paying for maternity cover for all four of you. This is due to the fact that Health Insurers sometimes bundle higher end benefits together in a rigid framework, which may be done intentionally who knows (there’s the cynic in me). With this example it would probably be best to drop down a level and fund dental treatment, as the cost of the extra benefits (i.e. maternity) would cost more than paying for trips to the dentist out of your own pocket.
The other option is to look for a modular plan that allows you to add on and take away as each member of your family requires. Generally the modules can take the form of routine dental treatment, maternity, holistic/alternative medicine or repatriation to name a few. This option can mean that each member of your family has coverage to suite their individual needs.
Weigh up the plan that you are considering highlight any benefits that you don’t need and assess how much this is costing you over and above taking a lower level plan. Then you can determine whether it is better to self-insure for these options, take the higher plan or find a modular provider that allows you to mix and match.
Cheap is Rarely Good Look For Value Instead:
We have come across people who pay less than US$300 per year and expect that they have adequate coverage in the case of a medical emergency. I understand that these people have worked hard for what they have and that they want to hold onto it. One sure fire way to lose a big chunk of your wealth is to foot the bill for a serious medical condition and you know what you are more likely to experience this scenario than you are to pop your clogs, which is why critical illness/trauma cover is more expensive than life insurance.
Sometimes it is probably a case of getting something that gives some peace of mind, which we understand and still feel that it is false economy. It doesn’t have to be the most expensive coverage that you can find and you know what, there are some very well priced plans that provide more than adequate cover. So please check what your plan really gives you find out what things cost with regards to treatments and see if you are covered or if you will be left short.
In most cases with health insurance the old adage “You Pay for What You Get” is applicable.
We hope that this has been useful for you and please let us know your thoughts or if you think that there some other important points that we have missed.
If you need help setting up a healthcare insurance plan for your family, company or yourself then please feel free to contact us and we will be happy to be of assistance.
Here is an article from the end of last year that we found interesting. It falls inline with our views on what is happening in Asia at the present moment in time, that could mean we live in interesting times.
Let us know your thoughts or if you have anything to add.
On the 27th January 2012 the Guernsey Association of Pension Providers (GAPP) welcomed proposals by the States of Guernsey to amend to amend its income tax laws on pension savings to meet the revised UK requirements for Qualifying Recognised Offshore Pension Schemes (QROPS) expected to come into effect on 6th April 2012.
These proposals will require resolution by the States of Guernsey which should happen in early March. After which a new pension regime will be introduced that is open to both Guernsey residents and non residents. The new rules provide no tax relief on contributions though they do mean that benefits will be paid free of Guernsey tax. It is anticipated that existing schemes will be transferred into the new regime meaning that they remain compliant with the new proposals from Her Majesties Customs & Revenue (HMRC).
GAPP have been known to have raised concerns over the proposed changes and in particular “Condition 4” with HMRC. They had requested that some of the changes be deferred for further consideration. Whether this means that HMRC are sticking fast to all of the proposed changes, then we cannot be sure though it does indicate that Guernsey is not taking any chances and intends to remain a leading player in the QROPS market.
It is also interesting that the importance of the Crown Dependencies to the City of London which was recently highlighted in the Foot Report could be lost if these centres have issues with compliance due to the proposed HMRC changes. So the changes will mean that funds continue to flow into the City from Guernsey based QROPS.
These changes come as no surprise and we are sure that there will be new announcements from other jurisdictions and HMRC in the near future.
So it would appear that Her Majesties Revenue, Customs & Excise (HMRC) has finally decided that they are losing too much tax revenue from the QROPS legislation introduced back in 2006. It was only a matter of time especially when we consider the budget deficits that the UK currently has and let’s be frank every bit counts at the moment. With more schemes being approved and more jurisdictions becoming available the cost of transferring into a QROP has dropped dramatically and by the end of 2010 over £1.3billion had been transferred and it was expected that 2011 would see over £500million being transferred out of UK pension schemes.
It has long been understood that HMRC would not tolerate “Pension Scheme Busting” where the pension fund is transferred into a QROPS and liberal interpretations of the legislation by the scheme administrators gives the member their whole fund in cash. This has been made evident with the ongoing issues with Singapore schemes and what would appear to be an intention to pursue individuals who liquidated their schemes. Concerns that this may still be continuing with New Zealand schemes have been thought to be a major consideration in the proposed changes in legislation with a view to making scheme busting as difficult as possible.
So what are the new proposals and what impact could they have for current QROPS members and future transfers? Well let’s take a look.
The main changes in the HMRC draft proposal are:
to impose substantial additional reporting and notification requirements, in particular an extension of the period in which a QROPS must report benefit payments to HMRC to the later of:
the expiry of five tax years after the tax year in which the member ceases to be UK resident (current requirement); and
ten years after the transfer payment to the QROPS is made (new requirement);
a new requirement for a prospective QROPS member to give a written acknowledgement to their UK pension scheme administrator (to be forwarded to HMRC) that the transfer payment overseas will be subject to an unauthorised payment tax charge if the receiving scheme is not a QROPS;
to require a QROPS jurisdiction to give the same tax exemptions in respect of benefit payments made to members who are locally resident as to members who are non residents;
to require a QROPS always to be recognised by the local tax authorities as a pension scheme;
to limit the scope for transfers to New Zealand pension schemes: the rules of a New Zealand pension scheme (other than a KiwiSaver Scheme) will have to impose various restrictions on the benefits that can be paid.
It would appear that most of the above will simply add to the administration burden for the scheme trustees the intention of HMRC is to make pension busting a much more difficult proposition. The proposed change which jumps out is c) as it could have connotations for anyone who is not resident in the same jurisdiction as their QROPS which is probably the vast majority of schemes. This possible change seems to leave people questioning what is the intention of HMRC in proposing it as they would not benefit from the tax revenue levied in say Guernsey or the Isle of Man. This could mean the possibility of a withholding tax being levied on benefit payments where resident members of a jurisdiction are taxed. Another interesting point here is that this proposal seems to benefit New Zealand schemes who have no tax on benefit payments which is ironic considering much of the focus of this draft legislation is aimed and stopping pension busting in this jurisdiction. Needless to say the result has been strong lobbying from the QROPS industry, offshore centres, rumours of proposed legislation changes in numerous offshore jurisdictions and the emergence of Malta as a possible jurisdiction of choice for the future.
It is not expected that the the tax changes in point c) will be imposed retrospectively though it would seem that the extended reporting period will be. It is also important to point out that HMRC clarified that 30% is the maximum drawdown though this could be impacted by the longer reporting rules which means that the QROPS will be subject to Uk legislation longer than the current 5 year rules.
Having said all this the proposals are draft legislation and we are still in a consultation period which ends on 31st January so things could change before the intended introduction date of 6th April 2012.
Interestingly enough the announcement from HMRC that “QROPS are only for individuals leaving or intending permanently to leave the UK.” holds firm with our own opinion that if you wish to consolidate your pensions into a more flexible structure and you could be heading back to the UK then a Self Invested Personal Pension (SIPP) may be a better option.
We think that one thing is for sure, that is the days of “pension busting” are numbered and if you have taken 100% of your benefits as cash through one of these schemes then don’t be surprised if you get a call from the UK Tax man.