QROPS definition: Qualifying Recognised Overseas Pension Schemes (QROPS) allow British expatriates or foreign nationals who have worked in Britain for a period to transfer their UK pensions overseas. A QROPS in Spain must meet UK tax regulations. If HMRC does not recognise the pension scheme, the UK scheme may refuse to make a transfer or levy a 40% tax on the transfer.
A QROPS pension transfer can provide an effective and flexible retirement solution, but you must understand the processes and pitfalls before going ahead:
- QROPS in Spain – what you need to know
- QROPS benefits when living in Spain
- QROPS rules and regulations
- Who is, and who is not eligible for a QROPS?
- The ROPS list of established schemes
- QROPS jurisdictions
The use of QROPS in Spain as a retirement vehicle offers Expats flexibility in investment and currency choice. It is essential to clearly understand pension legislation in your chosen country of retirement. After that, it is necessary to select an appropriate product that allows you to benefit from both a tax and investment perspective.
QROPS offer a certain degree of flexibility in terms of benefits. Below is an outline of the features of such schemes:
A tax-free commencement lump sum of 25% can be taken from an individual’s fund upon crystallisation of their pension in the UK. Current QROPS legislation also allows you to take up to 25% of your pension fund free from UK tax on retirement. However, it should be noted that the Spanish fiscal authorities will seek to tax such a distribution.
Provision of a retirement income
HM Revenue and Customs (HMRC) rules allow individuals to access 100% of their UK pension fund after 55. However, it is not advisable to encash your pension in full, as this can result in higher taxes on monies withdrawn. Instead, it is often better to draw an income from the pension fund periodically in a tax-efficient manner. The investment performance of funds within the pension portfolio will also play a significant role in this equation.
No compulsory annuity purchase
Expatriates who transfer their pensions into a QROPS have no obligation to purchase an annuity. Therefore, individuals can select funds that best suit their risk profile.
Reduction in currency risk
Retiring outside the UK on a sterling-based pension exposes your fund to unnecessary currency risk. QROPS solve this problem by allowing you to invest your retirement fund and take income and benefits in a currency of your choice.
A more extensive choice of investment options
Rather than being restricted to a limited range of funds offered by one insurance company, QROPS allows you to access funds managed by any of the world’s leading investment groups. This means you can create a portfolio that more accurately reflects your circumstances.
UK inheritance tax
Tax planning and pension planning go hand in hand. Assets held in a Qualifying Recognised Overseas Pension Scheme fall outside your estate for UK Inheritance Tax purposes if you die while living overseas. Unlike a UK annuity, the full value of your pension fund passes to loved ones upon death. This means your wealth is protected for future generations.
Although QROPS are not subject to UK Inheritance Tax upon the member’s demise, other jurisdictions may apply some form of domestic taxation. For example, expatriates with a QROPS in Spain need to know that succession taxes are levied upon death for Spanish residents. It is essential to take professional advice to address this issue.
The lifetime allowance pension cap
The transfer of UK pension savings to an overseas pension scheme must not exceed the Lifetime Allowance (LTA). The LTA limits the amount an individual can accrue in a UK tax-privileged pension fund. This is currently set at £1,073,100. If an individual transfers a pension from a UK-registered scheme to a QROPS while resident in a country such as France, it is deemed a Benefit Crystallisation Event (BCE).
When benefits are taken in the form of a pension commencement in either a lump sum or income withdrawal, the value of the savings being crystallised is tested against the available Lifetime Allowance. Should the value of the total UK pensions exceed that limit, an individual would be subject to a tax charge of up to 55% on any BCE upon retirement or death. For those who transfer their pensions to a QROPS whilst resident overseas, the LTA will no longer apply.
There are rules and regulations to ensure that a transfer to a QROPS functions correctly. The QROPS rules set by HMRC are designed to complement and be consistent with UK rules. It is thus necessary that these rules are adhered to for the overseas pension scheme to be accepted by HMRC. The criteria outlined by HMRC for a foreign scheme to qualify as a QROPS include the following:
- The pension scheme must be established outside of the UK
- It must be recognised for tax purposes in the country where it is located
- It must be regulated in the state in which it is established
QROPS Spain: Transfers to overseas pension schemes
The QROPS regime aims to mirror a regulated pension scheme in the UK. As such, a person who leaves the UK and takes their pension savings with them should be in a similar position as someone who remains in the UK with their pension savings. The QROPS rules set by HMRC are thus designed to complement and be consistent with UK rules.
QROPS Spain: reporting requirements
The rules on transferring pension funds from a UK-registered pension scheme to an overseas pension scheme have now become more streamlined to simplify the administration process. Full QROPS benefits are achieved after an individual has been out of the UK for ten consecutive UK tax years. This does not imply that you must wait ten years before transferring to a QROPS if you are a recent emigre to Spain. It does, however, mean that UK tax legislation still applies for the first ten years. As such, any withdrawals have to be reported to HMRC.
By transferring to a QROPS in advance of retirement, the LTA clock stops as the transfer is considered a Benefit Crystallisation event. This means that no matter how much your QROPS increases in value from that point, and as long as the 5-year rule is observed, you escape the punitive withholding tax of 25% on withdrawals over and above £1,030,000.
Furthermore, the scheme manager does not have to notify HMRC if the payment is made ten or more years after the day of the transfer that created the Qualifying Recognised Overseas Pension Scheme for the ‘relevant member’, provided that the person is a non-UK resident for the duration of this period. This ten-year ‘bracket’ for reporting payments took effect on 6 April 2012.
It should also be noted that the QROPS provider must report all pension distributions to the Spanish tax authorities (Hacienda) for the first ten-year period of non-UK residency.
Tax on QROPS at death
The previous UK tax charge of up to 55% on inherited pensions was replaced in 2015 by HMRC. Pension benefits can now be passed to beneficiaries tax-free in certain circumstances. There are several scenarios to consider should an individual die whilst living abroad:
- If a death payment is made within the 5-year reporting period, the QROPS trustees must report the payment to HMRC regarding the deceased member. If the individual died before age 75 within ten full and consecutive years of becoming a non-UK resident, the deceased’s pension would be treated under UK law.
- After ten full years of non-UK residency, 100% of the remaining fund should be available to beneficiaries free of UK tax on the provision that the individual dies before the age of 75.
- However, if the individual dies within ten full and consecutive years of becoming a non-UK resident, whilst 75 years of age or over, under UK law, beneficiaries would be taxed at their marginal rate on any drawdown from the pension. Beneficiaries can also receive the pension as a lump sum payment, subject to a tax charge of 45%.
Local Spanish legislation
Changes in legislation can affect the status of your QROPS. Expats from the UK must declare the value of their pensions, including those held in a QROPS to the Spanish fiscal authorities. Spanish residents must report income from a QROPS on their annual tax return. If you receive your pension lump sum whilst resident in Spain, it will be taxable in Spain.
To transfer your pension from the UK, you must abide by specific rules. First, you must have already left the country for tax purposes or intend to move soon. Once tax resident in Spain, you can transfer your pension fund from the UK into a QROPS as you would transfer between pension providers within the UK. Those eligible for such a transfer include:
- A UK national moving to Spain
- Any national who has built up UK pension benefits and is now resident or intending to become resident in Spain
Qualification for a UK pension transfer to a QROPS
To qualify for a QROPS, an individual should fulfil the following criteria:
- They must be between the ages of 18 and 75 years.
- Be either a British national who lives abroad or an individual who has previously worked in the UK and has UK personal or corporate pension plans.
- Have a pension fund above £75,000 for this arrangement to be cost-effective. Some providers will allow individuals to top-up their fund to meet minimum transfer value requirements.
- Applicants for a QROPS need to provide evidence that they have left the UK or plan to do so within the next 12 months. This can take the form of a lease on a property or a formal offer of employment.
QROPS Spain: What UK pensions can be considered?
The following recognised pensions can be transferred:
- Personal Pensions
- Final Salary Pensions
- Money Purchase Schemes
- Civil Service and Armed Forces
Guaranteed Minimum Pension (GMP) and protected rights can be transferred to a QROPS, providing the member consents in writing and acknowledge that the transfer is made at their own risk.
Who is not eligible for a QROPS?
When considering an overseas pension transfer, it is essential to note that not all pension funds are eligible to be treated as Qualifying Recognised Overseas Pension Schemes (QROPS). Indeed, when retiring to countries such as France, there are circumstances that a QROPS pension transfer is not a viable option.
UK pension funds that are not eligible for transfer include:
- If a pension has already been used to purchase an annuity, it will not be eligible. However, if you have already taken a lump-sum payment from your pension pot but have not bought a lifetime annuity, you may still qualify for a QROPS.
- Any pension that has already taken payment from a ‘final salary scheme’.
- UK State pensions.
It should be noted that pensions may be subject to UK tax and scrutiny from HMRC for the first five years of non-UK residency.
When not to use QROPS?
A transfer may not be permissible into an overseas pension scheme even if HMRC has recognised it as having QROPS status for UK tax purposes. Eligibility for transfer into a QROPS also depends on the scheme being able to accept a transfer under the country’s legislation in which it is established.
For those who do not qualify for a QROPS pension transfer, other options are available, depending on the size of your pension, the country you wish to retire in, and your tax and domicile status. The Self Invested Pension Plan (SIPP) is one of the more common investment alternatives for those who cannot take advantage of a QROPS.
A list of Recognised Overseas Pension Schemes (ROPS) can be found on the HMRC website. The ‘list’ consists of pension schemes that have informed HMRC that they meet the conditions to be a ROPS and have asked to be included. There are now over 1,000 QROPS to choose from across 29 different jurisdictions. European-based Expats seeking to move their UK pensions overseas are encouraged to seek out EU jurisdictions for their schemes, jurisdictions where a double-taxation agreement (DTA) framework exists.
How do I know if it is a legitimate scheme?
For a scheme to be classified as a Qualifying Recognised Overseas Pension Scheme (QROPS), it must first be a Recognised Overseas Pension Scheme (ROPS) and provide benefits in respect of retirement, ill health, death, or similar circumstances. If it meets these requirements, the scheme must take additional steps to qualify as a QROPS as defined by the legislation.
Not all transfers to overseas or offshore schemes are recognised as being QROPS transfers. Therefore, it is necessary to verify that the QROPS receiving your UK benefits is on a list published by HMRC. If the scheme is not on the ROPS list, any transfer would be treated as a transfer to a non-qualifying overseas scheme. This may result in substantial penalties being applied by HMRC at the time of transfer.
This list consists of pension schemes that have informed HMRC that they meet the conditions to be a ROPS and have asked to be included. It is important to note that QROPS providers self-certify the ‘list’; HMRC does not have an official approval system for ROPS. Therefore, it is the individual’s responsibility to determine if there is tax to pay on any transfer of UK pension savings.
The ‘Pension Schemes Services’ department usually updates the list twice a month. A scheme’s name will be promptly removed from the list once HMRC knows it has ceased to be recognised. Furthermore, should HMRC have concerns about the scheme’s status at any time, the scheme’s name may be removed whilst HMRC carries out further checks.
There can also be certain disadvantages in transferring to a QROPS, including the potential deregulation of the scheme. Schemes that are to be removed from the list are notified in advance by HMRC; the reasons for delisting are explained to the scheme manager. A QROPS is generally delisted if UK Pension administrators find insufficient pension regulation in a given jurisdiction. HMRC is not obligated to make public its reasons for delisting a particular scheme. Therefore, members concerned about their QROPS being removed from the published list should approach their scheme manager in the first instance.
Numerous territories are recognised as suitable for hosting overseas pension schemes. It is essential, however, to weigh up the pros and cons of each jurisdiction.
Malta is a favoured QROPS jurisdiction in Europe
Since 2009 Malta has established itself as a listed QROPS provider. It has a reputation for being a robust and well-regulated jurisdiction. Malta has the advantage of offering EU country-based schemes to the marketplace. Malta has an existing double-taxation agreement (DTA) framework in place. This framework consists of 59 countries, including the UK and renowned EU retirement destinations such as Spain.
The Spanish authorities recognise a QROPS based in Malta as a European pension. As such, income drawn from the QROPS will be taxed like any other Spanish pension.
When an individual buys a QROPS, it is regarded as a Malta pension, not a Malta trust. The trust is an administration vehicle and is used as a way of protecting the policyholder’s rights. The duties of the trustees are thus crucial in terms of how they look after an individual’s affairs/invest money.
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**Please note that it is necessary to speak with a professional financial adviser who will review your situation and determine if a QROPS pension transfer is appropriate for you.