01/03/2013 | Download PDF
‘Europe’ and ‘pensions’ aren’t words that are commonly used in harmony. The impact of Solvency II on company pension plans – and on insurance company annuities; the constraints on banking and the consequent discount rates that have affected rates; the complexity of funding rules, the impact of EIOPA, the EU regulatory authority; the constant drizzle of regulations and directives and case law on equal treatment and governance. All these and more have persuaded many of us to curse the intervention of the EU in the pensions scene.
However one of the main of objectives of the EU has been to open the market to pensions across borders, and while there are indeed constraints imposed by the EU system, there are also some very helpful and attractive opportunities, derived both from the European Pensions Directive (the IORPS Directive) and the impact of very generous and open European Court of Justice decisions. These changes have produced some very attractive pension opportunities, especially in the personal pensions market, in the form of SIPPs, SASSs, QROPS and QNUPS.
The reason is that the EU has decided that the tax barriers imposed by most EU jurisdictions, including the UK, are no longer permissible. If it is permitted to make a contribution to a pension scheme in one country, it is permissible to make the same contribution to a pension system in any other EU country, even if the domestic rules are not identical.
This has been EU law for very many years. For example years ago Jessica Safir was a Swedish citizen living in Stockholm who wished to make a contribution to a UK personal pension system. If she had made the contribution to the Swedish insurer she would have got Swedish tax relief. But the tax authorities objected to giving tax relief on contributions to a pension scheme in another country. She appealed, and eventually her case was heard by the European Court of Justice. The Swedish government argued that they were not being difficult just because they were tax authorities and that was what they did. Their argument was that if they gave the tax relief up front to money paid in another country, they were less likely to get the tax on the pension when it was eventually paid. That notion of ‘fiscal cohesion’ seemed pretty reasonable.
But the court was having none of it. It regarded the Swedish tax authorities as simply being awkward. And the principle of the EU was exactly to enable people in one country being able to get a better deal from a contract in another country. And Jessica was entitled to pay her contributions to a pension scheme in another country. And get the same tax relief.
This case and many others on the same lines have now made it clear that the tax authorities can no longer impose barriers on cross-border contributions – or indeed transfers. The only limits are on whether the payments are indeed to a pension scheme, and the definition of a pension scheme cannot be artificially limited to exactly the kind of pension scheme operated in the home jurisdiction. Once the payment is in the genuine foreign scheme, then it is subject to that country’s rules on investment and tax.
This case and a number of similar ones over the last decade have caused great anguish to not only HMRC but the fiscal authorities of other countries within the EU, who are also unhappy about having to give tax relief on contributions to pension schemes of other countries. But there is no doubt that the law is now clear and certain.
Which is not to say that the UK and other tax authorities try and make life difficult for pension contributors. So far as contributions to non-EU pension arrangements, for example those based in say Singapore or Guernsey or the Isle of Man, HMRC has the right to be as difficult as it pleases. But in the EU the cross-border freedoms remain.
UK citizens are free to establish or transfer their pension arrangements anywhere they like within the EU, subject of course to the receiving scheme being a genuine one. This is not a window of opportunity for pensions liberation schemes.
So we are now beginning to see the emergence of a number of cross-border pension opportunities. It is important to emphasise that the regimes are different for workplace pension schemes (governed broadly by the EU Pensions Directive 2003) and personal pension plans, governed by the freedom of services provisions of the EU treaty. But the outcome of course is the same.
There are advantages and disadvantages of moving pension rights to another EU jurisdiction. The tax laws (both income and inheritance) can be better or worse – although if pensions are received here, they will bear UK income tax. The investment rules may differ. And the regulatory rules will almost certainly differ, with different reporting and governance rules. In practice not all countries are suitable; the most attractive jurisdictions for workplace pensions include Austria (where all the legislation is in English), Belgium (where the government has deliberately made itself attractive for schemes around Europe), Gibraltar, Luxembourg and Malta. Cyprus was at one time thought to be working towards establishing a pensions facility, but all bets there are now off for obvious reasons.
Gibraltar is particularly attractive because its regime is simple (virtually word for word what the old UK HMRC scheme used to be, so it can hardly be considered to be fiscally unregulated), based in English, and with good communications and an excellent regulatory regime. It is also the only jurisdiction with protected cell legislation which is particularly attractive for market-linked annuities.
Whichever jurisdiction is now selected, it is important to understand which of the QROPS rules apply (and which do not), and whether there might be any adverse or unintended consequences whether tax or regulatory. But there is no doubt that with the much wider choice of country in which to base a pension, overhead costs can be cut, and benefits improved. Clients now have the chance to benefit from the harmony of European pensions.
(Robin Ellison is Chairman of London & Colonial)
Notes to Editors
About London & Colonial
London & Colonial specialises in self-invested products for both UK residents and persons resident overseas.
The London & Colonial Group includes
(1) London & Colonial Holdings Limited – UK parent company
(2) London & Colonial Services Limited which is regulated by the UK Financial Services Authority and operates SIPPs and SSASs
(3) London & Colonial Assurance PLC which is regulated by the Gibraltar Financial Services
Commission (matching UK standards) and which offers Open Annuities, QROP Annuities and Open Offshore Bonds
(4) L&C (Administration Services 2) Limited and London & Colonial (Trustee Services) Limited which are both based in Gibraltar and offer the EU SIPP.