Same Sex Marriage in the Expat Community: What About Your Pension?

Date Created: 14.04.2014

Same Sex Marriage in the Expat Community: What About Your Pension? 

On March 29th, the first legally recognized gay marriages took place in England and Wales. It is expected that similar marriages will be taking place in Scotland this fall. Even as many were celebrating these nuptials, others were attempting to figure out the implications of these weddings, including the UK expat community.

Historically, gay partnerships were unable to be recognized as anything more than domestic partnerships. While these partnerships received equal protections in most areas, there were certain areas that were explicitly exempted from receiving the same recognitions and rights as heterosexual marriages. One of these was the area of pensions.

As recently as February, the Bench has made decisions permitting pension firms to provide only the bare minimum in survivor’s benefits and similar payouts in the case of civil unions. This is based off an exemption provided in the Equality Act 2010 that permits private pension schemes to ignore contributions made by gay employees and their partners. [1]

Arguments leading up to the passage of the Marriage (Same Sex Couples) Act 2013 included references to this exemption. Many supporters believed that the legal recognition of the rights of gay couples to marry would close this loophole and provide the full benefits that domestic partners were currently being denied under civil unions. Unfortunately, the adoption of the Marriage (Same Sex Couples) Act 2013 left this particular situation unclarified.

Where Do Gay Pensions Stand?

Currently the act recognizing same sex marriages leaves the exemptions of the Equality Act 2010 in place. This means that for the time being private pension schemes can continue to restrict gay marriages to the bare minimum benefits. However, the act has provided a possibility for this to change. Under the provisions of the act, the Government is required to release a report no later than 1 July 2014 studying the impact of removing this exemption. Should the report find the removal to be beneficial, the Secretary of the State has the authority to eliminate the  exemption. [2]

This leads to a period of significant confusion regarding the status of same sex couples who are investing in or drawing on pensions. Until the report is released, it is impossible to know whether survivor’s benefits will be received in full, or reduced to a minimum in the case of gay marriages.

The Gay Expat’s Pension

As difficult as this is for the average gay couple to plan around, the situation is only worsened for British expats. Gay UK citizens who had married abroad had already discovered that the UK would not recognize their marriages. Instead, their marriages would be recognized only as Civil Unions. This had had significant impacts on gay pensioners living abroad.

Recognizing the difficulties that overseas pensioners were facing, particularly in terms of taxation and inheritance, HM Revenue and Customs established the Qualifying Recognized Overseas Pension Scheme (QROPS) on 6 April 2006. Under this program, pensioners who had been abroad for more than five years could transfer their pensions into foreign pensions without any penalties being assessed by HMRC. This would save these pensioners from the risk of being taxed twice, once by HMRC and again by their host nation.

In order for a foreign pension scheme to be recognized as a QROPS it had to comply with all HMRC requirements for domestic pension plans as well as being in a nation with which the UK had a Double Taxation Agreement. This ensured that anyone involved in a QROPS would receive the protections abroad they would receive domestically.

With the exemption provided for in the Equality Act 2010, however, foreign pension programs qualifying as a QROPS did not have to provide equal benefits to gay partnerships even when recognized as being married in their host country. This meant many legally married couples could not expect to benefit from their pensions at the same level other expats did.

The possibility the report to be issued on 1 July could require UK pensions to provide equal status to same sex marriages would seem to be of positive benefit to expat couples. However, there is a potential risk in such a decision for all expat couples, heterosexual couples included. Should the Government remove the current exemptions and require equal recognitions and protections some QROPS may suddenly find themselves in non-compliance with HMRC requirements. If this happens, previously secure overseas pensions could suddenly become liable to double taxation or penalties that could cost pensioners a great deal.

This wouldn’t be the first time this had occurred. In spring 2012 changes in HMRC requirements resulted in the delisting of a substantial number of pension schemes held in Guernsey and Cyprus. Further, HMRC assessed investors in a Singapore based QROPS called Rosiip penalties of 55% after declaring that it no longer qualified as a QROPS. [3]  (These fees wound up being reversed by the courts after two years of litigation.)

For couples who are looking to invest in a QROPS this means that all QROPS programs are potentially suspect. Pensions already invested may well be forgiven should their scheme be declared to no longer be compliant, but new pension transfers could suffer substantial hits. This means that for the time being, couples now celebrating the recognition of their marriages and living abroad now have to wade through quite murky waters in terms of their pensions.

None of the most popular destinations for a QROPS currently recognize gay marriages. The Isle of Man recognizes civil unions, and Gibraltar will soon join them in this recognition. Guernsey, however, has no such recognition and none of the three have any plans to recognize same sex marriages on their legislative schedules. While this does not mean schemes operating out of these jurisdictions would necessarily fall out of compliance should the exemptions of the Equality Act 2010 be removed, this means that investors have to take extra steps of investigation to protect themselves from this possibility.

While the new recognition of same sex marriage is enjoying its honeymoon period, come July 1st the honeymoon will be over and many couples could find themselves faced with potential hazards regarding their pensions abroad. As with all matters finance and law, it is advised that any same sex couples looking into transferring their pensions abroad consult with experts on the matter so that they might be able to continue to enjoy their lives together free from avoidable financial catastrophes.

Mario Vitanelli