Hi Folks

I have read with interest the various discussions on here regarding UK pension transfers utilising QROPS.

With regards to my subject heading can anyone explain how HMRC can actually implement the penalties of upto 55%? I just wonder how they can actually carry this through as I believe there is no reciprocal agreement between Canada and the UK. Has anyone heard of anyone who has withdrawn a portion early being hit with a penalty?

I am interested to find out others thoughts on this and those with a greater knowledge than me. I have read on here about the threat of penalties but no one has actually said how HMRC can implement the charges.

Thanks in advance

Hi Joandmarti,

I am a specialist in this area and have received an email directly from a senior specialist in HMRC (UK Tax authority) which outlines the situation. I have taken the text from the email directly and would be happy to send you a copy of the full email (with the name and contact details of the HMRC contact).

I hope this helps bring clarity for you in this area:

"When a transfer is made to a QROPS, the manager of the QROPS has an obligation to report to HMRC any payments that it subsequently makes to or in respect of the transferee where that payment takes place within 10 years of the transfer to the QROPS.
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Any payment made by the QROPS within 5 complete UK tax years of the member being UK resident is covered by the UK member payment provisions and any associated unauthorised member payment charges as appropriate.
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Where a payment is covered by the UK’s ‘Authorised Member Payment’ (“AMP”) provisions and the associated ‘Unauthorised Payment’ (“UP”) charges, what this means in simple terms is that the payment must be in keeping with what a UK registered pension scheme could have paid in identical circumstances. Where it doesn’t, this would constitute an UP and a liability to an UP charge will arise. That will be 55% of the payment that is considered to be an UP.
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As regards lump sum payments, they would have to meet all the three conditions set out below if they are not to attract a UP charge:
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·        Be paid on or after reaching ‘minimum pension age’ of 55.
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·        Be paid in conjunction with the commencement of a lifetime income, annuity or scheme pension. Â
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·        Amount to no more than 25% of the original transfer payment.
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These UK tax charges will apply regardless of whether a member is UK resident. They also apply whether or not the payments are also taxed by another country's tax authorities. However, where this is the case, allowance against the UK tax charges can be claimed.
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Any pension payments or income withdrawals covered the AMP provisions would have to be calculated and within the limits in the same way as would have applied under a UK scheme.
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Where a payment by the QROPS takes place outside the five years described above, the AMPÂ provisions and the associated UP charges do not apply."

The question was "how will they carry this through?".

Hi jericho,

Hopefully my original post provided some clarity on exactly which circumstances HMRC may levy an unauthorised payment tax charge and how the tax charge interacts with any Canadian tax on the same withdrawal.

As part of the reporting disclosure HMRC will have detailed information about the withdrawal and the person is applies to - where they can send a claim for payment of the tax owed.

I have sent a subsequent email to an HMRC specialist to confirm payment options (i.e. if HMRC have any options other than to follow the claim through with the individual). Ultimately if the tax was not paid HMRC could use the court system to claim payment.

I hope this provides additional clarity and will let you know when HMRC respond to the 'how'

Kind Regards

Paul

In the 4 Years + that I have been helping clients transfer their pensions to Canada, I have not been made aware of any clients that have made an unauthorized withdrawal and have been contacted by the HMRC to pay the penalty.

It seems that since QROPS was introduced in 2006 the HMRC have been quite lenient in following through with this penalty when a client has made an unauthorized withdrawal.

However, with the introduction of the new QROPS rules that came into effect in April of this year, and more crucially the introduction of a signed client declaration to the HMRC stating that the client is aware of the tax penalties for making an unauthorized withdrawal, It seems that the HMRC will be getting tough when it comes to charging this penalty.

In regards to how the payment would be made, the HMRC Registered Pension Manual states :

"The person liable to the unauthorized payments charge should declare the payment on their Self Assessment return. Where someone does not receive a Self Assessment return they should report their chargeability to tax in respect of the payment to HMRC."

In summary, the HMRC now appear to be getting tough on QROPS and making sure that the rules are followed, so therefore If an unauthorized withdrawal is made, one should expect the HMRC to follow through with the penalty of up to 55%.

Hi There,

Okay so I have a pension withdrawal question. We transferred our UK pensions here in 2009 but due to financial issues at the moment we are looking to access $20,000 of it. I know people will not agree with it but we have looked at all other avenues.

We are aware of the withholding tax of 30% to Canada and also the 55% penalty charge from the UK. When we told our adviser of our decision he informed us that we would need to cash $133,000 of our pension to be left with the $20,000 that we wanted.

He explained that we needed to cash the 55% for the UK as well as the 30% for Canada. Is this correct? it doesn't seem right as it is increasing the amount to withdraw before you get the money. I know they automatically take the 30% for Canada.

Any advice welcome, Thank you.

I don't know, but this is what I assumed would happen. HMRC would wish to ensure that the organization holding the funds ensured the penalties would be paid. Makes complete sense to me but I don't know if this is actually the case.

I'm hoping that it's not the case. Rang the HMRC but the QROP's adviser is not in until Monday.

I assumed that since they are not applying it as a tax but a penalty charge. Then it would not be applied the same as a tax (the 55% is 55% of 26,000 similar to the way interest is applied to a loan and not part of the gross figure with 26,000 being the net. If that makes sense) It almost seems like that want to apply it as tax but not call it a tax, due to the double taxation rule. Surely it has to be one or the other and applied in that way.

To withdraw around $20,000 we would cash $26,000, $6,000 withholding tax applied at 30%. The financial group would then report the withdrawal to HMRC.

HMRC would then apply the 2 charges, 1 for 40% under section 208 of the Finance Act and 15% under 209 of the Finance Act. These percentages can also be increased or decreased by the HMRC ( that is written into the Act)

I figured that the HMRC would them charge us the penalty on the $26,000 withdrawal which would be about $14,300. Making the total cost to us $40,300 (about that figure) which includes Canadian Tax and the unauthorised payment charge.

If they apply it before and we have to cash $133,300 to obtain $20,000 then the UK get $107, 500???? For a withdrawal of $26,000 (with Canadian tax) The math on that figure make the withdrawal penalty 413.5% or there abouts (my math is not the best)

Wouldn't borrowing the funds that you need make far more sense ?
If you have to deal with HMRC ask to speak to David "Big Dave" Hartnett. He's the go to guy to make a deal !

Hi Simon,

Unfortunately it is seen as the easy option to borrow the money from a UK transferred pension as previously this is money that you would not have been able to access, but you are quite right , due to the penalties involved and due to historically low interest rates it would make much more financial sense to borrow the money than to take it from the RRSP.

However the rules are the rules in regards to RRSP's and the option is available to withdraw from the plans.

Not withstanding the penalties and tax fees, by taking money from the RRSP you would be seriously affecting your pension income at retirement........which ultimately is what your RRSP is for.

However, every persons circumstances are different and a withdrawal from the RRSP may be the only option....................but it really should be viewed as that.........the last option !!!

Are the same penalties levied if one uses the fund to retire after the 5 years but before the 10 year anniversary of the transfer ?

Believe me we have thought long and hard about the decision but we have no other way to make things work.

Yes it worries me how it will affect our retirement but I would rather get to retirement with my house and health intact. We are lucky that both myself and husband brought over very good pensions and we both contriubute to several plans over here as well.

We have been foolish with money but this is a real wake up call. I may end up that we don't withdraw, as paying $107, 500 for a withdrawal of $26,000 in my view is Robbery by the UK government but we will see if that is the case.

Tangram, reading the new rules the 5 years penalty stays the same but HMRC have extended the period in with the companies have to report a withdrawal to 10 years. I am sure that is to test the water and in time when they see how much is being withdrawn after the 5 years, they will extend it to suit them.

Doesn't really answer the question.

As per my previous post I have not been made aware of any of my clients that have been approached in regards to the 55% penalty tax levied by the HMRC and can only quote what is stated in the HMRC pension schemes manual ( as quoted above ) on how any penalty would be levied.

My clients that have withdrawn from their RRSP within the HMRC penalty period have not been requested by the receiving scheme in Canada to withdraw any HMRC penalty at the same time as making the withdrawal from their RRSP.

The HMRC penalty would be totally seperate from any tax/penalties levied by the CRA for withdrawing funds from your RRSP.

I would speak with your RRSP provider and ask them to explain why you have to withdraw the 55% again from your RRSP as this will mean :

1) your witholding tax will be higher with the CRA because you are now taking out a further 55% from your RRSP.
2) the 55% penalty tax would then be higher from the HMRC because this tax is levied on any funds that are withdrawn from your RRSP and therefore if you are withdrawing the penalty tax from your RRSP, this will increase the amount taken and thus increasing your 55% taxable charge........vicious circle.
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However I can see why your advisor has given you this information.

If you are borrowing money from your RRSP because you have exhausted all other avenues to raise this money........................how will you then be able to pay the HMRC the 55% in tax that the HMRC will request for making an unauthorised withdrawal from a UK transferred pension.

Unfortunately if/when the HMRC request this charge it will have to be paid from somewhere so I believe this is why your advisor has given you the information they have.

It is not an easy solution because as previously mentioned if you are borrowing money from the RRSP to pay the 55% tax charge to the UK you will be hit with a double whammy both from the CRA perspective and the HMRC perspective.

That is why I can only ever advise clients to take money from the RRSP as a last resort and not as the first option to look at. With the new rules that were introduced from April of this year in regards to QROPS the HMRC are going to get tough in respect of the 55% penalty for making an unauthorised withdrawal from a UK transferred pension. I would not view this penalty as something that may happen.......I would view it as something that will happen !!!