Please note that this article was written in late 2014. On December 19 2014, a draft Statutory Instrument was published which, inter alia, expressly restricted the payment of retirement benefits (whether in the form of a tax free lump sum or pension income) from the age of 55.
As a result, all previous Indian QROPS schemes have been delisted from the official list of QROPS schemes published on 1 July 2015 (with the exception of two Indian schemes, promoted by Exide Life). This has, in effect decimated the local Indian QROPS industry.
Please read our updated analysis of QROPS in India for further information.
Indian QROPS Schemes: pre-2015
We often get asked at QROPS Adviser Group whether we can transfer a client’s UK pension into a local Indian QROPS scheme, such as HDFC Life, SBI, ICICI Prudential, or one of the other local schemes. After all, QROPS Adviser Group is an independent firm of financial planning and pension consultancy – surely we should also recommend local Indian QROPS schemes, if this is what the client has specifically requested?
However, we as a company have taken the position not to offer our clients local Indian policies, for both compliance/legal and reputational risk reasons, which I will outline below.
Indian QROPS – too good to be true?
In relation to the local Indian QROPS policies, we can understand how these schemes may look attractive at first sight for someone returning to India with their NHS or private sector pension. The annuity rates offered by these schemes are very respectable as a result of the current high interest rates in India (there is a strong positive correlation between interest rates and annuity rates).
And, perhaps more importantly from the perspective of a scheme member, he or she can take their tax free lump sum and start receiving their pension income as early as 30 in some instances.
QROPS Adviser Group is frequently approached by both providers of local Indian QROPS schemes (such as HDFC Life, SBI) to promote their schemes. However we feel that the vast majority of local schemes are not true pension plans in the sense of ‘providing an income in retirement’, if you can access your pension at such an early age.
The risk with these schemes is that if the HMRC subsequently removes a scheme from the approved QROPS list and you have already taken your tax free lump sum and are drawing an annuity, then you will be liable to pay a 55% tax charge on all funds you have received.
And there are strong reasons for arguing that some of the local providers themselves know this – some Indian QROPS require all customers to sign a disclaimer waiving the India QROPS scheme of any liability if HMRC delist the scheme, and impose a tax charge on the client. So they are tacitly admitting there may be a problem with their own scheme!
We published an article on this website around 6 months ago detailing these risks, and why we consider it inappropriate to recommend such schemes to clients: http://qropsadviser.in/concerns-over-india-qrops-schemes.
Unfortunately, even if asked by a client, we are unable to even recommend any particular local QROPS scheme or an agent, as we do not wish to be seen to be endorsing either the product or the particular agent or company.
The reason for this is that when problems start to occur with these schemes – and yes, it is a question of when, and not if – QROPS Adviser Group does not want any potential liability from clients who have been faced with a 55% tax charge on their £200,000 pension transfer.
Adopting this approach has undoubtedly cost us a significant amount of money in terms of referral/introduction fees. However, we strongly feel that our long term reputation is more valuable.
India QROPS schemes removed from HMRC list
Recently we have seen our stance slowly being vindicated to some extent – earlier this month HMRC removed over 50% of the Indian schemes from the approved QROPS list – http://qropsadviser.in/15-india-qrops-schemes-delisted-from-hmrc-16-july-2014-qrops-list.
India is clearly on their radar now – the HMRC has already delisted 15 out of 27 Indian QROPS schemes, and they are still looking into other Indian schemes. They will be looking closely at the reporting from the schemes to identify schemes which are not following the QROPS rules. It will therefore only be a matter of time before other schemes which are still on the list are banned.
Financial Planning Considerations
Another question that a client needs to consider is from a financial planning perspective – as to whether they really need to draw down an income if they are only in their 30’s or 40’s.
Let’s take an example of a doctor returning to India who has previously worked for the NHS, and wishes to transfer the NHS pension into a QROPS in India. He is 40 years old, has worked for the NHS for 12 years, and has a transfer value of £150,000. One option would be for him to transfer his pension into an immediate annuity plan with a local Indian QROPS provider, and take a modest monthly annuity income.
If this client leave the funds to invest, and compound over the next 10 years (the earliest you can access your pension under Malta rules is aged 50), then based on a very conservative net return of 7% per annum, the fund of £150,000 will have increased to £295,000. With an average annualised investment return of 9% the fund will have increased to £355,000.
At this stage, you are able to withdraw a 30% tax free lump sum of either £88,500 (@7%) or £106,500 (@9%), in addition to then being able to draw down a substantially higher income.
Thus the long term benefits of leaving your pension to accrue, in order to build a significant pension pot, are compelling, as opposed to taking an immediate income, which the client does not strictly need, as he will be working in a doctor in India on a relatively high salary.
If your circumstances change – then you can change your QROPS
Another important consideration to bear in mind is that after you have transferred your pension into a Malta scheme, you still retain flexibility to transfer it back into an Indian QROPS at some stage in the future if you need to.
There is the option further down the line to transfer your Malta QROPS into an Indian QROPS – if your personal, financial circumstances should change, and you wished to take an early retirement perhaps. The nature of a Malta QROPS is that your funds are held within an investment account, and if you wanted to transfer to an Indian scheme in order to access your fund perhaps for emergency or family reasons, then this would be possible.
Investment returns v Annuity Rates
Whist annuity rates are currently attractive in India, the investment returns on a managed investment portfolio through Malta will compare very favourably. Typically, we would target investment returns of between 8% to 9% per annum.
Investing in India
Many Indians who return to India to live or work express a desire to invest a part of their investment fund in Indian companies. With a QROPS transfer to a jurisdiction such as Malta, this is entirely possible, and many clients take up this possibility. QROPS Adviser Group has therefore conducted extensive research into some of the best performing Indian investment funds on the market, many of which have significantly outperformed the Indian stock market indices.
For more information about QROPS schemes in general, or for a free, no obligation consultation in relation to your UK pension, please contact us