What is a QROPS? – Qualifying Recognised Overseas Pension Scheme
We all know how important it is to plan our retirement in the best way possible. Recent developments in UK pension legislation allow expatriates to do just that in the form of Qualifying Recognised Overseas Pension Schemes, otherwise known as QROPS. This strange sounding acronym offers allow British expatriates, or foreign nationals who have worked in Britain for a period, to transfer their UK pensions overseas.
This section looks in greater detail at the origin of QROPS and the processes involved in the transfer of UK pensions overseas. Topics include the following:
- Definition of a Qualifying Recognised Overseas Pension Scheme
- Rules and regulation
- The ROPS list of established schemes
- Case example
1. QROPS definition
QROPS were introduced in 2006 as part of a major overhaul of Britain’s pension framework, aimed at simplifying pension transfers to another country. New legislation was passed by the UK tax authority, HM Revenue and Customs (HMRC), in order to comply with an EU directive that pensions be free to move across Europe’s borders. This ruling means that individuals, wishing to retire to countries such as France, Spain and Portugal, can effectively take their UK pension funds with them.
- Read more about transferring your UK pension to a QROPS when living in France
- Read more about transferring your UK pension to a QROPS when living in Spain
- Read more about transferring your UK pension to a QROPS when living in the Netherlands
2. QROPS rules and regulations – what you need to know
What makes a scheme a QROPS?
As in every process, it is important that there are rules and regulations to make sure 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 in order for the overseas pension scheme to be accepted by HMRC. The criteria outlined by HMRC for an overseas scheme to qualify as a QROPS include:
- 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 country in which it is established
Transfers to overseas pension schemes
The transfer of UK pension savings to an overseas pension scheme must not exceed the lifetime allowance (LTA). The LTA is a limit on the amount that an individual can accrue in a UK tax privileged pension fund. This is currently set at GBP1 million. When an individual makes a pension transfer from a UK registered scheme to a QROPS, while resident in a country such as Spain, Portugal or France, it is deemed as being a Benefit Crystallisation Event (BCE). When benefits are taken in the form of a pension commencement lump sum and / 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.
The aim of the QROPS regime is to mirror that of 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 a person 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.
Age that benefits can be taken
Benefits, including lump sum payments, from the transferred funds may not be distributed earlier than the normal retirement age of 55. An individual’s must have been a non-UK resident for five complete tax years before accessing benefits.
QROPS Pension Transfer Reporting requirements
HMRC Rules state that the Revenue should be notified if a payment is made within the first five tax years of a member becoming non-UK tax resident. Any benefits paid before five complete tax years of non-UK residency and not in accordance with UK Pension rules will be deemed an unauthorised payment.
The scheme manager does not have to notify HMRC if the payment is made 10 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 non UK resident for the duration of this period. This 10 year ‘bracket’ for reporting payments took effect as of 6 April 2012. The rules on the pension transfer of funds from a UK registered scheme to an overseas pension scheme have now become more streamlined in order to simplify the administration process.
3. QROPS benefits
For those eligible for a transfer to a QROPS, there is a certain degree of flexibility in terms of how and when benefits can be taken.
There are a number of advantages to be had in terms of taxation and investment by choosing a QROPS as your preferred retirement vehicle. Such advantages can be enjoyed in the following areas:
- Lump Sum Benefits
In the UK, a tax free commencement lump sum of 25% can currently be taken from an individual’s fund upon crystallization of his/her pension. Current QROPS legislation allows you take up to 30% of your pension fund free from UK tax on retirement. However, it should be noted that certain countries may seek to tax such a distribution. For example, should you decide to take this lump sum while resident in France, you would be taxed at 7.5% under current legislation.
- Provision of a Retirement Income
HM Revenue and Customs (HMRC) rules allow individuals to access 100% of their UK pension fund after the age of 55. However, it is not advisable to encash your pension in full, as this can result in higher taxes on monies withdrawn. 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. Individual’s therefore have the freedom to 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 pension, and take income and benefits in a currency of your choice.
- Greater choice of investment options
Rather than being restricted to a limited range of funds offered by one particular insurance company, QROPS allows you to access funds managed by any of the world’s leading investment groups. This means you are able to create a portfolio which more accurately reflects your individual circumstances.
- UK Inheritance Tax
Tax planning and pension planning go hand in hand. Assets held in a Qualifying Recognised Overseas Pension Scheme fall outside of 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.
It should be noted however that although QROPS are not subject to UK Inheritance Tax upon the demise of the member, other jurisdictions may apply some form of domestic taxation. Expatriates who are in possession of a QROPS in France, need to be aware that there are succession taxes levied upon death for French residents. It is important to take professional advice in order 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 is a limit on the amount that an individual can accrue in a UK tax privileged pension fund. This is currently set at £1,055,000. If an individual makes a pension transfer from a UK registered scheme to a QROPS, while resident in a country such as France, it is deemed as being a Benefit Crystallisation Event (BCE).
When benefits are taken in the form of a pension commencement lump sum and/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.
4. QROPS disadvantages: why they may not be suitable
There are also a number of disadvantages associated with pension transfers to overseas schemes. It is always necessary to identify both the advantages and disadvantages as part of the decision making process. Suitability depends on residency, how long it has been since you left the UK, your current pension benefits, your ability to survive on your pension income in a given country, the eligibility of your personal pension scheme for transfer overseas, etc. QROPS disadvantages may include the following:
The Overseas Transfer Charge on pensions
The UK budget of Spring 2017 delivered a new 25% tax on the overseas transfer of UK pensions; this includes transfers to QROPS. Exceptions were thankfully made for individuals living in the same country that the scheme is transferred to, and where both the individual and the scheme are resident in the EEA.
The greatest impact will be on people moving to countries outside the EEA. If the person moves to a country outside the EEA, then the QROPS provider will also need to be based in that country or a 25% tax charge will apply. This may create an issue as not all jurisdictions will have a QROPS provider that meets the qualifying criteria for HMRC.
Lost benefits as a result of a pension transfer to a QROPS
Many defined benefit/final salary pension schemes offer guaranteed minimum pensions and cost-of-living-adjustments that are linked to an inflation index. These benefits are built into the final salary scheme. They are not however transferable to a QROPS; only the actual value of the retirement fund is. As you cannot replicate these benefits following a pension transfer, they are forfeit.
Conflict over interpretation of QROPS legislation
Many providers are established in jurisdictions within Europe, and thus are subject to EU pension regulation; Malta is a prime example. However, QROPS established outside of the Eurozone do not have to comply with EU regulations. This can lead to two issues:
- I. Exposure to foreign regulators and legislation that may be disadvantageous to, or even target expatriates specifically. This may include fees, taxes, disclosure, and areas of compliance that either damage your retirement income or make it more difficult to manage.
- II. Lack of effective regulation, which may lead to financial malpractice. Individuals may be targeted by disingenuous advisers due to the commissions/fees at stake.
Whilst schemes recognised by HM Revenue and Customs are obliged to offer certain minimum requirements and benefits, those that operate in certain foreign jurisdictions may have rules and regulations that are inconsistent with those of HMRC.
Potential Scheme De-Registration
Schemes that currently qualify as QROPS are not necessarily guaranteed that status going forward. If your scheme finds itself in trouble with the regulators for some reason or other and is stripped of that status or delisted, your transferred funds may be subject to the very taxes that you initially tried to avoid.
5. ROPS list – Where are the schemes established?
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 on the list. There are now over 1,000 QROPS to choose from across 29 different jurisdictions. European-based expats seeking a UK pension transfer 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?
In order for a scheme to be classified as a Qualifying Recognised Overseas Pension Scheme (QROPS) it must first of all 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 certain 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. It is necessary to verify that the scheme 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 pension 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 on the list. It is important to note that the list is self-certified by QROPS providers; HMRC do not have an official approval system for ROPS. It is therefore the responsibility of the individual to find out if there is tax to pay on any transfer of UK pension savings.
The list is usually updated twice a month by the ‘Pension Schemes Services’ department. A scheme’s name will be promptly removed from the list once HMRC is aware that it has ceased to be recognised. Furthermore, should HMRC have concerns about the scheme’s status at any time, then the scheme’s name may be removed whilst HMRC carries out further checks.
As mentioned previously, there can 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 scheme is generally delisted if UK Pension administrator’s find that there is insufficient pension regulation in place in a given jurisdiction.
HMRC make every effort to distinguish between providers who have applied for an exemption from regulation and those who have not. They are under no obligation to make public their reasons for delisting a particular scheme. It follows therefore that members, who are concerned about their scheme being removed from the published list, should approach their scheme manager in the first instance.
6. QROPS jurisdictions
There are numerous territories which are recognised as being suitable for the hosting of overseas pension schemes. It is important however to weigh up the pros and cons of each jurisdiction.
Malta is a favoured QROPS jurisdiction in the European market
Since 2009 Malta has established itself as a listed QROPS provider. It has been proactive in the development of the QROPS market with the installation of local regulators to work with HMRC in order to ensure that all rules and procedures are adhered to. Malta has the key advantage of being able to offer EU country-based schemes to the marketplace.
Individuals who intend to retire to a European country, and have their UK pensions transferred to a recognised overseas pension scheme, should give serious consideration to Malta as the jurisdiction of choice. Malta has an existing double-taxation agreement (DTA) framework in place. This framework consists of agreements with 59 other countries including the UK, and renown EU retirement destinations such as France, Spain and Portugal.
7. QROPS case example – The European mobile professional
Silvia is a European national who has recently moved from the UK to the Netherlands. She worked for 20 years as an international lawyer for 4 different companies and intends to work in other EU countries before retiring in France. She has 4 pension pots from 4 different insurance companies, all of which are defined contribution schemes. Defined contribution simply means her pension entitlements are based on contributions from herself and her employer. These contributions are invested, and she will have an option to take a pension based on annuity rates at her time of retirement.
Annuity rates are calculated by insurance company specialists who work out Silvia’s expected life-span then apply a percentage rate to the pot from which she can withdraw income. So, in the case of a 65 year old for example, this rate would be around 4% per annum.
Silvia has around £400,000 in total and is not expecting to work in the UK again.
- As the funds are currently invested in pounds, can she change to € to more accurately reflect the currency she will eventually use in France?
- Can all 4 pension pots be consolidated into 1?
- As Silvia is married and has 2 children, what is the inheritance tax position?
- Silvia has noticed that the funds her pensions are invested in are middle of the road performers and there isn’t much choice available other than those offered by the insurance companies. What are her options
- Silvia knows she can take 25% of her funds in cash, free of UK tax. How would that be treated in France?
Although Silvia does not expect to work in the UK again, Lifetime Allowance (LTA) legislation means that tax benefits are only allowable up to a maximum of £1m. This means that if she leaves her pension funds in the UK and they perform well (let’s say by 10% per annum), her £400,000 will soon exceed the LTA. Using the ‘rule of 7’ for simplicity, whereby the principle doubles every 7 years if increased by 10% compound interest per annum, it would only take about 10 years to reach her LTA. As a result, if she decides to work in the UK again, she won’t be able to claim tax relief on pension contributions. She could even end up creating tax liabilities. It is also possible that the LTA could be reduced in future years; we have witnessed the gradual erosion of the LTA from £1.8m to the current £1m.
10% per annum compound interest is indeed a good return; however, it is not impossible with the right investment portfolio. In Silvia’s case either she will reach her LTA too quickly or her funds have to perform badly to avoid this. Neither scenario is an attractive outcome.
The answers to Silvia’s case are summarised below. It should be noted that behind most simple answers is a plethora of technicalities which would also need to be addressed and resolved.
- Pension funds invested in a QROPS can be held in any freely convertible currency available globally. In Silvia’s case, she would opt for a Euro based portfolio. This eliminates any current or future currency risk on her pension plan.
- One of the many benefits of such a vehicle is that it is possible to transfer all of your pension plans into one easy to manage pot. So, Silvia can consolidate all 4 of her pensions into a QROPS. This is particularly important for those with 2 large and 2 small pots, as transferring the smaller pots individually could be expensive and therefore not worthwhile.
- In the event of Silvia’s death, her pension funds would be treated as follows:
- If she dies before the age of 75, there will be no UK income tax on the benefits paid to the beneficiaries, whether taken as a lump sum or income
- If she dies after the age of 75, the beneficiaries will pay income tax on any benefits that they receive at their applicable marginal rate, whether taken as a lump sum or income
The survivor may in turn nominate who they wish to receive any remaining funds, whether taken as a lump sum or income, to be paid to in the event of their subsequent death. The arguments in favour of a pension transfer to a QROPS are greater in the event of death after the age of 75.
- Another major advantage of investing in this type of pension is the availability of ‘open architecture’ for the underlying investments. Put simply, this means Silvia can invest in almost any investment fund available world-wide. This is in stark contrast to her current situation whereby she is restricted to only a few options for each pension.
- A number of QROPS allow up to 30% of a pension pot to be withdrawn in cash on pension commencement. Care has to be taken in terms of local tax legislation; a good adviser can calculate the best way to do this. In France it may well be best to invest in an Assurance Vie, as they provide significant tax benefits for investors. Most EU countries have their own version of tax beneficial investment products; it is important to be aware of this.
Finally, although Silvia didn’t specifically ask about the Lifetime Allowance, her adviser has more good news as QROPS don’t impose LTA’s. As such, rather than being penalised for good investment performance, Silvia will be rewarded as her pension can grow unrestricted, therefore making both her Pension Commencement Lump Sum and income higher.
The adviser’s job is to take care of all administration on Silvia’s QROPS case, provide the investment platform and tax advice and carefully look after her pension with future servicing.
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**Please note that it is important to speak with a professional financial adviser who will review your personal situation and determine if a QROPS pension transfer is appropriate for you.