QROPS & Expat Pension Transfers
A Qualifying Recognised Overseas Pension Scheme is a HMRC recognised pension that can receive transfers of UK pension assets. QROPS are a compelling consideration for expats that are no longer contributing to UK pensions and want to enjoy increased flexibility.
It is important to note that expats with a QROPS that have not completed five full tax years overseas and those returning to the UK, assume the tax status of UK resident with a UK registered scheme.
Also, further to changes introduced by the Chancellor of the Exchequer, pensions transferred after March 9th 2017 could incur an overseas transfer charge of 25% if certain criteria are not met, more on which can be found below.
Why use QROPS?
The differences QROPS and SIPPS have gradually reduced, so consideration should be given to which is suitable as individual circumstances are unique. Our guide below covers the main considerations of pension transfers and should be used in conjunction with advice specific to your circumstances.
Lifetime Allowance (LTA)
The lifetime allowance is the amount you can accumulate in your pensions before additional taxation is triggered. If your pension exceeds £1,073,100 (2020/2021), the lifetime allowance charge will be as follows:
55% if the excess is taken as a lump sum
25% if the excess is taken as income (annuity or drawdown) in addition to taxation at your marginal rate.
By transferring your pension to a QROPS, it is tested against the LTA (£1,73,100 in 2020/2021) and any growth thereafter will not be subject to additional tax. This means that your investment can grow indefinitely without the threat of further penalties.
Income Tax Benefits
QROPS can limit UK taxation on income if the scheme member has lived outside of the UK for 5 previous tax years. This does not mean that tax is not payable and you may be subject to income tax in your country of residence and/or where the QROPS is domiciled. It is crucial to consider tax obligations where you will likely take income because DTA's (double taxation agreements) vary greatly and need to be observed.
Popular QROPS destinations include Malta, Gibraltar and the Isle of Man and more on each can be found on our QROPS jurisdictions page.
Taxation on Death
As a non-UK pension, using QROPS can provide protection from UK inheritance tax (IHT). QROPS pension funds are no longer part of the member's estate, so as long as beneficiaries are not UK tax resident they can receive the remaining funds tax-free. However, beneficiaries may have to adhere to inheritance tax rules locally so it is important to seek advice where resident.
Having flexible access to pension funds is big motivation to transfer. Defined benefit schemes pay an income correlated to an employee's final salary and length of service and starting at age 60 or 65. Income increases with inflation and is capped, while some schemes may offer a lump sum at retirement and if taken, reduces the income thereafter.
Using a QROPS removes many restrictions, such as waiting until 65 to receive income and instead, allows access at age 55 and a tax-free lump sum of 30%. Taking income depends on the jurisdiction of your QROPS and always remember, taking larger payments after your tax-free lump sum may attract higher taxation so taking local tax advice is recommended.
Final salary/defined benefit schemes are managed without the member's input. Using a QROPS is often influenced by having more control and involvement in investment decisions. The investment choices are vast and as always, advice should be sought to ensure assets are suitable.
Increased flexibility also creates potential pitfalls. Permitted assets vary with the investment guidelines of each trustee and as many still accept investments that generate commission, it's vital to seek regulated advice to ensure securities are being selected in your best interests and not those of your advisor. Read more about avoiding pitfalls on our Good To Know page.
Most QROPS providers permit investment into recognised asset classes;
Collective investment funds
Equities, stocks and shares
Assets usually prohibited might include;
Antiques, art and collectable assets (and moveable) in general
Unregulated collective investments (find out more on 'UCIS' funds on our Good to Know page)
Final salary schemes generally have rigid terms for paying death benefits. A wife, husband or qualifying spouse of the deceased receives 50% (sometimes rising to 66%) of the member's benefit on death. This ceases on the death of the surviving spouse (unless children under the age of 18 remain, or age 21 and in full time education) and the fund then effectively disappears.
Pension transfers can help avoid the fund being lost on death of a surviving spouse, allows the selection of beneficiaries and provides control over how remaining funds are distributed. Proceeds are taxed according to the scheme's domicile and tax residency of the beneficiaries.
The 25% Overseas Tax Charge
In March 2017 the Chancellor of the Exchequer introduced a 25% tax on QROPS at the point of transfer, unless the new scheme and the member are in the same country, within the European Economic Area (Liechtenstein, Norway, Iceland or EEA) or is it an occupational scheme from the individual's employer. Pension transfers had seen little change since 2006 and subsequently, applications fell.
Income from QROPS transfers made on or after April 6th 2017 and within five tax years are taxed in the UK (if the member is resident in a country not qualifying for exemptions), further extending the reach of HMRC. The charge can be reversed if within five years, criteria for a tax-free transfer once again apply (for example, the member returns to the EEA, Norway, Iceland or Liechtenstein and has a Maltese QROPS).
The difference in cost of SIPPs and QROPS can be a deciding factor. Larger schemes can dilute higher charges but set-up and ongoing costs can be expensive for smaller values. However, there are schemes designed for smaller pensions although the investment choices may be limited.
QROPS generally cost more than SIPPs. Trustees charge set-up costs of between £600-£1,250 and then an annual fee of between £500-£1000. It's important to remember there are also additional costs to consider such as platform and advisor fees, more on which can found on our costs page.
Request a Free Consultation
A detailed explanation of pension transfers by a FCA regulated advisor is required as the benefits can be lost without qualified advice. The process is irreversible once complete and despite the FCA introducing measures to protect pensioners, thousands still fall victim to cold-calls, too good to be true scams, unregulated funds and poor advice.
To speak to an advisor that will help guide you through a safe and secure pension transfer, complete the contact form and you'll the help you need.