What is a QROPS? – Qualifying Recognised Overseas Pension Scheme
A QROPS is an HMRC recognised pension scheme that allows British expatriates or foreign nationals who have worked in Britain for a period of time to transfer their UK pensions overseas. The pension scheme must meet requirements set by UK tax law and mirror that of regulated pension schemes in the UK.
It’s important to understand the processes involved in a QROPS transfer and to seek qualified financial advice before going ahead with a pension transfer:
QROPS were introduced in 2006 as part of a major overhaul of Britain’s pension framework, aimed at simplifying pension transfers to another country. HM Revenue and Customs (HMRC), the UK tax authority, passed legislation to comply with an EU directive for pensions to be free to move across Europe’s borders. This ruling means that individuals wishing to retire to France, Spain, and Portugal can effectively take their UK pension funds.
2. QROPS rules and regulations: What makes a scheme a QROPS?
As in every process, there are rules and regulations to ensure that the transfer functions correctly. The QROPS rules set by HMRC are consistent with UK rules. It is necessary to abide by these rules for the overseas pension scheme to be accepted by HMRC. The criteria outlined by HMRC for a foreign pension to qualify as a QROPS include:
The pension scheme must be an overseas pension scheme
It must register with the country’s tax authority as a pension scheme
The local pension scheme state regulator should oversee the administration of the scheme
What is a QROPS pension transfer?
Put simply, your pension savings, whether from one UK pension or several pensions, are transferred into an overseas pension scheme. The QROPS does not have to be established in your country of residence, thus providing greater choice for your savings.
The QROPS regime must mirror that of a regulated pension scheme in the UK. Subsequently, 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.
Who is eligible for a pension transfer?
If you wish to transfer your pension out of the UK, you must have already left the country for tax purposes or intend to go shortly. Once a tax resident in an EU country, you can transfer your pension fund out of the UK into a QROPS in the same way that you would transfer between pension providers within the UK. Those eligible for such a pension transfer include:
Qualification for a UK pension transfer to a QROPS
To qualify for a QROPS, an individual should fulfil the following criteria:
He/she 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 owns UK personal or corporate pension plans.
Have a pension fund above £75,000 for this type of 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 prove that they have left the UK or plan to do so within the next 12 months. A property lease or formal offer of employment will suffice.
UK pensions eligible for transfer to a QROPS
You can transfer the following recognised pensions:
Personal Pensions
Final Salary Pensions
Money Purchase Schemes
Civil Service and Armed Forces
It is possible to transfer Guaranteed Minimum Pension (GMP) and protected rights to a QROPS. However, the member must consent in writing and acknowledge that the transfer is at their own risk.
Who is not eligible for a QROPS?
Making a pension transfer to a QROPS is not always a viable option. UK pension funds that are not eligible include:
Any pension which has previously purchased an annuity. However, if you have already taken a lump-sum payment from your pension pot and have not bought a lifetime annuity, you may still qualify for a QROPS.
Any pension that has already made a distribution from a ‘final salary scheme’.
UK State pensions.
**Note: Pensions may be subject to UK tax and scrutiny from HMRC for the first ten years of non-UK residency.
When not to use QROPS?
A transfer to an overseas pension may not be permissible even if it qualifies as having QROPS status by HMRC. Eligibility also depends on the scheme being able to accept a transfer under the legislation of the host state country.
There are other options for those who do not qualify for a transfer to a QROPS. The International SIPP is an alternative for those with smaller pensions or anyone retiring to a country outside Europe.
You can take that benefits at age 55
HMRC rules allow individuals to access 100% of their UK pension fund after age 55. However, it is not advisable to encash your pension in full, as this can result in higher taxes on withdrawals. It is often better to draw an income from the pension fund periodically in a tax-efficient manner.
QROPS Pension Transfer Reporting requirements
The rules on the transfer of 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 achievable after an individual has been out of the UK for ten consecutive UK tax years. However, you do not have to wait for ten years before transferring to a QROPS if you are a recent emigre. It does mean that certain aspects of UK tax legislation still apply for the first ten years. As such, the QROPS trustees will report any withdrawals to HMRC during this time.
By transferring to a QROPS in advance of retirement, the LTA clock stops as the transfer is considered a Benefit Crystallisation event. From that point onwards, any increase in the value of your QROPS will avoid the punitive withholding tax of 25% on withdrawals over £1,073,100.
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 non-UK resident for the duration of this period.
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 pass to beneficiaries tax-free in certain circumstances. There are several scenarios to consider should an individual die while living abroad:
If the QROPS trustees make a death payment within the 10-year reporting period, they must report it to HMRC. UK law takes precedence if the individual died before 75 and within ten full and consecutive years of becoming a non-UK resident.
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 died before the age of 75.
However, if the individual dies within ten full and consecutive years of becoming a non-UK resident, while 75 years of age or over, under UK law, beneficiaries would pay tax at their marginal rate on any drawdown from the pension. Heirs can also receive the pension as a lump sum payment, subject to a tax charge of 45%.
3. What are the benefits of QROPS?
QROPS have many benefits; individual scheme features will affect your retirement planning in different ways.
The advantages available in terms of taxation and investment include:
Lump-sum benefits
No compulsory annuity purchase
Reduction in currency risk
More extensive range of investment options
UK Inheritance Tax (IHT)
Lifetime Allowance (LTA) pension cap
Lump-sum Benefits
Individuals benefit from a tax-free commencement lump sum of 25% in the UK upon crystallisation of the pension. QROPS legislation also allows you to take up to 25% of your pension fund free from UK tax on retirement. You should check with a financial adviser to confirm if a lump-sum distribution is taxed in your country of residence.
No Compulsory Annuity Purchase
Expatriates who transfer their pensions into a QROPS have no obligation to purchase an annuity. Individuals 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 retirement fund and take income and benefits in a currency of your choice.
More extensive range of investment options
Many pension providers restrict you to a limited range of funds. By contrast, a QROPS allows you to access funds managed by any of the leading investment groups. As a result, you can create a portfolio that more accurately reflects your circumstances.
UK Inheritance Tax (IHT)
Tax planning and pension planning go hand in hand. If you die while living abroad, assets held in a QROPS fall outside your estate for UK IHT purposes. Unlike a UK annuity, the full value of your pension fund passes to loved ones upon death, protecting your wealth.
You should note that expatriates who own a QROPS in France are subject to succession taxes upon death. It is essential to take professional advice on this matter.
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 that an individual can accrue in a UK tax-privileged pension fund. The LTA is £1,073,100 at present.
When an individual transfers a pension from a UK-registered scheme to a QROPS, there is a Benefit Crystallisation Event (BCE). If you take benefits in the form of a pension commencement lump sum or income withdrawal, HMRC will test the value of the savings crystallised against the available LTA. 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 LTA will no longer apply for those who transfer their pensions to a QROPS while resident overseas.
4. QROPS disadvantages: why they may not be suitable
There are also some 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 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. There are exceptions 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 most significant 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 link to an inflation index. These benefits are built into the final salary scheme. However, they are not 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 the interpretation of QROPS legislation
Many QROPS providers set up an office in a European jurisdiction and are subject to EU pension regulation; Malta is a prime example. However, QROPS that establish a base outside of the Eurozone do not have to comply with EU regulations.
While schemes recognised by HM Revenue and Customs are obliged to offer specific minimum requirements and benefits, those that operate in certain foreign jurisdictions may have rules and regulations that are inconsistent with those of HMRC.
5. ROPS list: Where are the schemes established?
A list of Recognised Overseas Pension Schemes (ROPS) is on the HMRC website. It consists of pension schemes that have informed HMRC that they meet the conditions to be a ROPS. European-based Expats seeking to move their UK pensions overseas are encouraged to seek out EU jurisdictions for their schemes where a double-taxation agreement (DTA) framework exists.
How do I know if it is a legitimate scheme?
For a scheme to qualify as a QROPS, it must first be a Recognised Overseas Pension Scheme (ROPS). It must also 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 pension transfers to overseas schemes qualify as being QROPS transfers. It is necessary to verify that the QROPS receiving your UK benefits is on the HMRC list. HMRC will treat a pension transfer to a scheme that is not on the ROPS List as a transfer to a non-qualifying overseas pension and may impose substantial penalties.
This list consists of pension schemes that have informed HMRC that they meet the conditions to qualify as a ROPS. It is important to note that QROPS providers self-certify the list; HMRC doesn’t have an official approval system for ROPS. Therefore, it is the individual’s responsibility to find out if there is tax to pay on any transfer.
The updated list of ROPS notifications
The list is usually updated twice a month by the ‘Pension Schemes Services’ department. A QROPS will be removed from the list if it no longer qualifies for recognition. If there are concerns about its status, HMRC may suspend the scheme and conduct further background checks.
As mentioned previously, there can be certain disadvantages in transferring to a QROPS, including the potential deregulation of the scheme. The UK Pension administrator will delist a QROPS if it finds insufficient pension regulation in place in a given jurisdiction. They are under no obligation to make public their reasons for delisting a particular scheme. Members who are concerned about the removal of their QROPS from the published list should approach their scheme manager.
6. QROPS jurisdictions
Numerous territories qualify as being suitable for the hosting of overseas pension schemes. It is essential, 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 the primary jurisdiction for QROPS providers. The local Maltese regulators work with HMRC to ensure compliance with rules and procedures. Malta has the advantage of being able to offer EU country-based schemes to the marketplace.
British Expats retiring to Europe should consider Malta as the jurisdiction of choice to transfer their UK pension. Malta has an existing double-taxation agreement (DTA) framework in place. This framework consists of agreements with 59 other countries, including the UK and renowned EU retirement destinations.
It is essential to be aware of recent changes to the Malta QROPS rules regarding investment management. As of 1st January 2019, Malta QROPS providers are now legally required to ensure financial advisers abide by MiFID 2 (Markets in Financial Instruments Directive) rules. If you seek to transfer your UK pension into a Malta QROPS, you need to check that the adviser holds the necessary permissions.
Advisers are obliged to obtain an investment license to comply with the new MiFID regulations. They will also be held accountable for the sales of recommended funds to clients and expected to ensure that they suit their ‘risk profile’.
Financial advisers must also disclose any fees and commissions on the QROPS application form. Clients will have to agree to and sign a declaration stating they are fully aware of their plan’s total costs and charges.
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 four different companies and wishes to work in other EU countries before retiring in France. She has four pension pots from 4 different insurance companies, all of which are defined contribution schemes. Defined contribution 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 lifespan then apply a percentage rate to the pot from which she can withdraw income. So, in the case of a 65-year-old, 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.
Silvia’s questions
As the funds are currently invested in pounds, can she change to Euro to more accurately reflect the currency she will eventually use in France?
Can all four pension pots be consolidated into one?
As Silvia is married and has two 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 seven years if increased by 10% compound interest per annum, it would only take about ten years to reach her LTA. As a result, if she decides to work in the UK again, she can’t 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 £1,800,000 to the current £1,073,100.
10% per annum compound interest is 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 poorly to avoid this. Neither scenario is an attractive outcome.
The answers
The answers to Silvia’s case are below. You should note that behind most simple solutions is a plethora of technicalities that 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 fund. So, Silvia can consolidate all 4 of her pensions into a QROPS.
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 they receive at their applicable marginal rate, whether taken as a lump sum or income.
The survivor may 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 more convincing in the event of death after age 75.
Another significant advantage of investing in this type of pension is the option of an ‘open architecture’ type of structure for the underlying investments. This means Silvia can invest in almost any investment fund available worldwide. This contrasts with her current situation, whereby she is restricted to only a few options for each pension.
Some 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. It may well be best to invest in an Assurance Vie in France as they provide significant tax benefits for investors. Most EU countries have a domestic version of tax beneficial investment products.
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 positive 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.
**Please note that it is essential to speak with a professional financial adviser who will review your situation and determine if a QROPS pension transfer is appropriate for you.
HMRC rules allow individuals to access 100% of their UK pension fund after age 55. However, it is not advisable to encash your pension in full, as this can result in higher taxes on withdrawals. It is often better to draw an income from the pension fund periodically in a tax-efficient manner.
