Pensions are extremely valuable financial products. Not only do they provide income for your retirement, but they also come with considerable tax benefits.
But what do you do if you want to transfer your pension to another country? If you’re living abroad, or plan to do so in the near future, you might be concerned about leaving your pension in the UK where new legislation may have an adverse impact on your retirement plans.
This is where a QROPS can help.
Designed to help those who plan to become expats, a QROPS might be exactly what you’re looking for. To see if they’re right for you, here is everything you need to know about them.
What is a QROPS?
A QROPS is a Qualifying Recognised Overseas Pension Scheme. It’s an international pension scheme, rather than a UK-based one, although it must be registered with Her Majesty’s Revenue and Customs (HMRC).
If you are a UK resident who has relocated to another country, for example to work or retire abroad, then you may wish to consider transferring benefits from your UK pension scheme to a QROPS.
What types of pensions can be transferred to a QROPS?
Strictly speaking, it’s possible for a UK resident to transfer benefits to a QROPS but it is generally people who are about to emigrate overseas – whether to work or retire –who tend to make this type of transfer.
UK pensions that can transfer to a QROPS fall into two broad groups:
- Defined Benefit (DB) schemes (also known as ‘Final Salary’ schemes)
- Defined Contribution (DC) schemes (also known as ‘Money Purchase’ schemes)
The following types of pension cannot be transferred to a QROPS or any other type of scheme:
- DB schemes where your pension is already in payment.
- Unfunded UK Government Pension Schemes eg Police, NHS, Teachers etc.
- UK State Pensions.
Is there a minimum amount I need to have in my fund before I can transfer?
It is difficult to give a precise answer to this question. It depends upon your financial circumstances and whether you are making other transfers at the same time in order to consolidate your pension arrangements. If you are trying to make a small one-off transfer, you need to consider carefully whether the costs of transferring will be worth it.
Do all EU countries have a QROPS?
Many European countries have QROPS providers although the main ones are located in Malta, Gibraltar and the Isle of Man – all highly financially regulated regimes.
What are the advantages of a QROPS?
The advantages that can be specifically attributed to a QROPS are:
- You may be able to take up to 30% of your fund as a Pension Commencement Lump Sum (‘PCLS’) compared with a UK scheme
- Protection from currency risk – you can invest your pension fund and take benefits in your local currency
- More favourable tax conditions – although this very much depends upon your country of residence. As always, you should seek tax advice before you transfer.
Other advantages of a QROPS are not unique – they also apply to UK DC schemes:
- You can control the timing and amount of any income and Pension Commencement Lump Sum (PCLS) that you draw from your fund
- You can pass the value of your pension fund to your spouse or other beneficiaries on your death.
The Lifetime Allowance (LTA)
A major reason to transfer to a QROPS – until this year – was the Lifetime Allowance (LTA) which imposed a limit of £1.73m on the total ‘tax-privileged’ amount you could hold in your pension fund.
Any fund in excess of this amount would be taxable at 25% (or possibly 55% if you took the excess amount as cash). A transfer to a QROPS would remove any future liability to the LTA .
The Spring Budget 2023 abolished the tax on any excess funds with the LTA itself due to be abolished in April 2024 which means that one of the main reasons for considering a transfer to a QROPS has now diminished in importance.
However, the Labour Party has said that if it wins the next General Election, it will reintroduce the LTA. This means that there may still be a case for transferring to a QROPS if you have a fund in excess of the LTA or if it is likely to be so by the time you retire.
Overseas Transfer Allowance (OTA)
- You may think that because the LTA excess charge has been abolished, you can ‘crystallise’ (transfer) your UK funds to a QROPS with no charge even if you are over the current LTA of £1.73m. However, the Government has introduced a new charge known as the Overseas Transfer Allowance (OTA). The charge is 25% of the excess over £1.073m for any transfer from a UK scheme to a QROPS. A transfer to another UK arrangement – such as to a SIPP or another Personal Pension – is exempt.
- However, you could still give serious consideration to a transfer to a QROPS even if your fund is in excess of the OTA. The reason for this is simple – any excess charge will simply increase over the years as your fund grows. You may wish to rid yourself of any future potential liability by transferring to a QROPS sooner rather than later.
What are the disadvantages of a QROPS?
The potential disadvantages are:
- Giving up any guaranteed retirement and death benefits attached to a DB pension
- Losing the protection afforded by the UK Pension Protection Fund to DB schemes
- You take on the running costs that are currently paid by your existing DB scheme.
- You may pay higher charges than those levied by your existing DC scheme
- Exposure to investment risks that are currently borne by your existing DB scheme
- Paying a higher level of tax in countries where there is no Double-Tax Agreement.
QROPS tax criteria
Although a QROPS can sometimes provide tax benefits, they will be determined by the tax laws of the country you’re moving to; we recommend that you consult a tax advisor before committing to a transfer.
What are the potential taxes when transferring from a UK scheme to a QROPS?
There is an Overseas Tax Charge (OTC) of 25% on transferring UK pension scheme benefits to a QROPS unless certain exemptions apply. The two most common ones are where:
- The QROPS is established in the same country as the one in which you are resident
- The QROPS is established within an EEA State and you are resident in an EEA State or Gibraltar
There is now also the Overseas Transfer allowance as stated above.
What are the potential taxes when withdrawing from your QROPS?
Transferring your pension to a QROPS doesn’t automatically exempt you from certain UK tax rules. There are reporting requirements that the QROPS provider must adhere to in order to avoid your fund being taxed.
If you should return to the UK within five years or transferring, certain benefits such as PCLS and death benefits may revert to UK rules.
How do you arrange a transfer to a QROPS?
The following should be considered before starting the transfer process:
- Seek financial advice – this is now a legal requirement when transferring from a DB scheme. Although it is not a requirement for a DC transfer, it would be prudent to take advice for these transfers as well
- Check the HMRC ‘ROPS’ list – Many organisations, including HMRC, have now dropped the “Qualifying” part of the name and simply refer to QROPS as ‘ROPS’. Check that the QROPS (ROPS) that you’re interested in is registered on the HMRC website. All providers effectively ‘self-certify’ that their rules meet HMRC requirements; their presence on the list is not a guarantee that they actually do so
- Check that your pension can be transferred to a QROPS – although you may have already discussed this with your financial advisor beforehand, it’s always best to double-check that your pension can actually transfer to a QROPS before you start
- Complete the required documents – you will be required to complete the discharge forms associated with your pension transfer.
New regulations came into force on 30 November 2021 that require both DB and DC schemes to perform additional, quite stringent, checks which have been designed to prevent pensions scams.
You should therefore be prepared to enter into what can sometimes be quite a lengthy checking process – and could include a requirement from you to attend an appointment with the UK Government’s MoneyHelper guidance service before the transfer value can be paid out.
You should also be aware that the process of transferring DB and DC pensions can be extremely lengthy due to the complexity and regulations involved. In particular, DB transfers can be extremely complex and have the additional burden that the transfer value may be valid for only three months. This may seem like a long time but it is surprising how long the advice process can take so it’s best to place this in the hands of a financial adviser right at the start of the process.
Professional QROPS advice, such as that provided by our team at Blacktower, can help ensure that your planning takes full account of all your financial needs and the many regulatory requirements.
We’re well-placed to provide the financial consultation you need if you’re thinking of transferring pension benefits to a QROPS. Please contact us today to see how we can help.
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This communication is for informational purposes only, based on our understanding of current legislation and practices which is subject to change and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.