QROPS or SIPP?

We are often asked whether it’s best to transfer a UK pension to a QROPS (Qualifying Recognised Overseas Pension) or an International SIPP.

The answer is ‘it depends’. 

We understand that everyone’s circumstances are unique, and no ‘one size fits all’ solution exists. However, some indicators help you make the correct decision.

The basic product structures are very similar; however, International SIPP plans, also known as non-resident SIPPs (Self-Invested Personal Pensions), are UK-based, while QROPS for EU expats are issued in Malta. 

Due to historic links between the UK and Malta, the two countries' pension systems are largely identical. In the case of Malta QROPS, these similarities are deliberate; this means they appear on the HMRC-approved list and are thus suitable for UK pension transfers.

The Brexit effect on Pension transfers from the UK

First, as a consequence of the UK leaving the EU, the availability of advice has changed. 

UK advisers and pension providers can no longer advise clients unless they have a fully operational company in the country where the individual lives. Very few companies comply with this requirement.

British-based pension providers, or financial advisers, can still send information to their clients, but cannot advise on investment funds or the tax implications of holding that plan for anyone who doesn’t live in the UK. 

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They can advise on UK legislation, but that’s often of limited value as the person’s tax position will be driven by their EU residency.

This means that anyone considering a QROPS or International SIPP transfer should ensure they are dealing with a company that can advise them in their country of residence, in conjunction with qualified local tax advice. 

The adviser should be MiFID-regulated and have the necessary experience to create an appropriate investment portfolio for the individual’s risk appetite and overall financial situation. 

Definition: ‍ II provides a comprehensive set of rules that determine how securities – such as shares, bonds and derivatives – are traded in the EU, particularly on trading platforms and traditional stock markets.Source: EC.europa.eu

So, let’s examine the main issues for anyone considering transferring their UK pension into an overseas pension scheme.

QROPS and International SIPP plans contain the following similarities and differences

Flexible Access Drawdown (FAD).

Essentially, this means the policyholder can access their money in the way that best suits their financial situation. 

Theoretically, the whole fund can be taken in one go, but this is rarely a good option as the tax implications would be prohibitive. It’s usually better to draw down as much additional income as is required year by year.

One of the differences between QROPS and International SIPP plans is that QROPS providers will pay gross of Malta tax in most circumstances, whereas non-resident SIPPs pay net of any potential UK tax. This isn’t necessarily an issue, as the UK pension will pay up to 25% free of UK tax and up to the annual allowance, without tax deduction.

It’s also possible to apply for an NT Code from HMRC, which enables the pension provider to pay gross of UK tax. Any overpayment can also be reclaimed from HMRC if an NT Code isn’t in place. 

It should be noted that the tax-free element of a UK pension is only free from UK tax. It doesn’t mean it’s tax-free in the country where the individual is tax resident.

Investment platforms

QROPS or International SIPP plans can hold a variety of investment platforms and structures. Most providers have strict investment guidelines that should protect investors from overly costly funds, unregulated funds, and scams.

Hidden fees

When dealing with an adviser, it’s essential to confirm the fee structure before starting the transfer process. The adviser should fully disclose all costs and fees, and both parties should sign the Terms of Business.

Fees tend to fall into the following categories:

• QROPS or SIPP annual fees. QROPS tend to be more expensive than non-resident SIPP plans. It’s important to assess whether it’s worth the additional cost to, for example, escape a possible reintroduction of the Lifetime Allowance in the UK.
• Investment platform fee.  This fee is easy to find; the adviser should provide an official illustration that includes it. Avoid complex charging options and ensure your adviser uses a ‘clean structure’.
• Adviser fees. These can be expressed as a percentage or a fixed fee. This fee is often hidden by complex charging structures that lock clients in for lengthy periods. It’s always possible to surrender an investment, but the costs could be prohibitive. Any adviser who won’t tell you the percentage commission the investment provider pays the company should be avoided!
• Annual adviser fees. This charge should be expressed as a percentage or a fixed fee and is designed to cover the adviser’s annual costs for providing services, investment management, and plan administration. Again, this fee should be explicit and agreed upon before investing. It’s important to ensure no additional fees are embedded in fund recommendations.
• Fund fees. The only annual fund fee that matters is the ‘Overall Charges Figure’ (OCF). Don’t be fobbed off with Annual Management Charges (AMC) as these are often lower than the real cost of investing. I have seen examples whereby the AMC is quoted at 2.50%, which is eye-wateringly high, but the OCF comes in at a whopping 4.15%. This is outrageous and should be avoided

The Pension Transfer Flag system

The Pensions Regulator introduced a flag system for transfers in 2021. The intention was to prevent fraudulent transfers. 

Although this is welcome and an important part of the war against scams, the law of unintended consequences means that many UK pension providers misinterpret the rules and impose additional requirements on top of the usual due diligence required for any transfer. 

This has become a particular difficulty for QROPS providers as, although they have strict regulations regarding acceptable investments, there appears to be a lack of communication between the Malta and UK regulators. As such, some UK pension providers view QROPS transfers with suspicion for no good reason.

Malta's investment regulations could be considered tighter than UK rules nowadays, as unregulated investments and esoteric funds are now all but banned. This isn’t the case in the UK yet, but I expect this to improve.

This confusion has meant most QROPS transfers are only approved if the client has completed a ‘Money Helper’ appointment. This isn’t a problem, but it adds to the time to complete the transfer. 

A good adviser can help guide you through the process, although it’s important to note that the adviser shouldn’t sway the individual.

The flag system is constantly monitored and updated; however, work still needs to be done.

Changes to the Lifetime Allowance charge

The UK Chancellor abolished the Lifetime Allowance charge (LTA) on the 6^th of April 2024. New legislation was introduced regarding lump-sum payments, either during the lifetime of the pension policy holder or upon death.

The Lifetime Allowance Death Benefit charge was introduced, meaning any tax-free payments during the lifetime were capped at £268,275, and any lump sum payments made to beneficiaries on death were also capped at this amount, with the excess being taxed at their marginal rate. 

The tax-free lump sum allowance was based on 25% of the old LTA of £1,073,100.

It’s also important to note that payments made that are lower than the Lump Sum Death Benefit Allowance in cases where the pension policy owner dies before age 75 are generally free of tax.

Changes after the 2024 November budget

QROPS transfers are no longer free of the Overseas Transfer Charge (OTC). 

Before the 2024 budget, transfers to EU or EEA countries were exempt from the 25% charge applied to transfers to other territories.

For this reason, QROPS transfers are unlikely to be a good idea, although there are specific circumstances in which paying the tax may be fiscally prudent in the long term. UK SIPPs are assets based in the UK, so can be considered as part of a person’s estate for Inheritance Tax purposes. If the whole of a SIPP could be considered for IHT, a 40% tax could be incurred.

As QROPS are non-UK situs assets, the fund may be exempt from UK IHT if the owner qualifies as a Non-UK Resident.

Although transferring an existing SIPP to a QROPS is unlikely to be beneficial, QROPS-to-QROPS transfers don’t incur UK tax. 

For existing QROPS holders, it’s worth checking the effectiveness of your provider and advisers. You may well be able to reduce costs and improve investment performance.

Opinion of Axis Financial Consultants)

When QROPS were first introduced, a minimum transfer amount of £80,000 was considered appropriate. In most cases, this minimum should now be higher. 

Non-resident SIPP plans have evolved over time and can now compete with QROPS in terms of the sophistication of online investment platforms and are generally lower cost.

Generally, unless the individual has a potential Lifetime Allowance issue, a non-resident SIPP will usually provide everything needed.

The most important issue for everyone is full disclosure of fees. 

Any slight advantage one route has over the other can be dwarfed by excessive charges if advisers won’t or can’t tell you exactly how much each element of the pension structure costs. 

In particular, real fund fees are often hidden and can be difficult to understand.

There are advantages to both routes. What matters most is how they apply to each individual.

If you would like to know more about choosing an International SIPP vs a QROPS, get in touch with us.

FAQS

What are the main differences between an international SIPP and a QROPS?

There are many key differences between an International SIPP and a QROPS, but the most significant one is that an International SIPP is a UK-based pension plan that offers flexible investment options and protects its members from excessive regulatory restrictions, whereas a QROPS is an overseas scheme, generally based in Malta.

What types of investments are available with International SIPPs?

As with QROPS, International SIPPs offer a range of investment options, including Stocks, Bonds, and Global Funds, so you can customise your portfolio to achieve specific financial objectives.

Will my residency status and future plans impact my ability to use either an International SIPP or a QROPS?

Yes, your residency status and future plans will significantly impact your decision between using an International SIPP and/or a QROPS, as they will affect your tax obligations and the suitability of the chosen option for your financial objectives.

Is it necessary to seek professional guidance before deciding whether to use an International SIPP or a QROPS?

Yes, Professional Guidance is imperative to ensure that your pension is optimised to your unique requirements, to help you understand the fees and penalties associated with your chosen pension vehicle, and to assist in making informed decisions regarding your retirement.