It’s difficult to overstate the benefits of having a pension. Not only does it provide a substantial level of funds for your retirement, especially if you plan on retiring overseas, but these funds often come with reduced-tax burdens.
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 worried that certain laws in your new home may impact your UK pension, or you may be required to open an entirely new one once you arrive.
This is where QROPS come in.
Designed to help those planning on becoming expats make the most of their UK pensions, a QROPS pension 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 pension?
QROPS stands for Qualifying Recognised Overseas Pension Scheme. It’s an international pension scheme based on the pension jurisdiction of your new country of residence rather than the UK, but only uses foreign pension schemes which are registered with Her Majesty’s Revenue and Customs (HMRC).
Because of this, QROPS are only available to those who qualify as expats as a way of transferring their UK pension benefits when they relocate to another country – such as when they retire.
Pension schemes that qualify as QROPS are any that match the guidelines set out by HMRC and have informed them that they wish to be considered in the scheme, and many may offer you greater flexibility and benefits over your current UK fund, such as choosing to take a lump sum of 30%, rather than 25% from your fund before tax applies.
You can also draw a higher pension income through many of these funds compared to if you were in the UK, and with certain QROPS, you likely won’t need to purchase an annuity.
Much like any UK pension, you can access your QROPS pension once you reach the age of 55, but you also have to have been a non-UK resident for a minimum of five tax years.
How do qualify for a QROPS?
As stated above, if you’re a UK resident who has or is about to emigrate overseas – whether to work or retire – and have built up a pension fund within a private scheme, then you’re eligible for one.
UK private pensions that qualify as QROPS fall into two broad groups:
- Money purchase schemes
- Final Salary Schemes
With that being said, most types of pension scheme can be transferred to a QROPS, with the exception of the following:
- Defined benefit schemes where pensions are already in payment.
- Unfunded UK Government Pension Schemes.
- State Pensions.
Alongside this, if your Defined Benefit pension is worth less than £100,000, it’s unlikely that a transfer to a QROPS will make financial sense for you.
As for confirming your eligibility for this type of pension, you must meet the following criteria:
- Have a UK pension (not including a state pension) of any value.
- Either live – or plan to live – overseas in the near future.
- Don’t expect to return to the UK (or at least won’t be in the country for a minimum of five years).
- Have not purchased an annuity on the pension in question.
- Do not have your pension scheme signed to a drawdown agreement (if you’ve chosen a final salary scheme).
Do all EU countries qualify for a QROPS?
The majority of countries in the EU have QROPS providers that fall in line with HMRC guidelines. But even if a Qualifying Recognised Overseas Pension Scheme isn’t an established scheme in your new country of residence, you will likely still be eligible for one.
What are the advantages of a QROPS?
Qualifying Recognised Overseas Pension Schemes can offer certain benefits to deferred scheme members who wish to transfer their pensions abroad. Some of these major advantages could include:
- Control of the timing and amount of any income and Pension Commencement Lump Sum (PCLS) that you draw from your fund.
- The ability to pass the value of your pension fund to your spouse and/or family upon your death.
- Access of up to 30% of the fund as a PCLS.
- Removal of the effect of the UK Lifetime Allowance (LTA), which places a limit (currently £1.06) on the total value of your pension fund.
- Protection of your retirement income from currency fluctuations.
- More favourable tax conditions.
- Greater flexibility in investment options.
- The ability to receive your withdrawals in local currency.
What are the disadvantages of a QROPS?
Despite the advantages offered by this type of pension, it’s also very important to point out that, if you go through with a QROPs pension transfer, there are potential disadvantages you might incur, such as:
- Giving up any guaranteed retirement and death benefits attached to your current fund.
- Losing the protection afforded by the UK Pension Protection Fund.
- Taking on the running costs that are currently paid by your existing scheme.
- Exposure to investment risks that are currently borne by your existing scheme.
- Paying a higher level of tax in no double-tax law is in place.
With this in mind, it’s absolutely recommended that you speak with a financial expert before considering a QROPS pension transfer.
QROPS tax criteria
Although a QROPS can provide tax benefits, said benefits will be determined by when and where you transfer and withdraw your pension. Payable tax will be determined by the tax laws of the country you’re moving to, meaning it’s always best to talk to a tax advisor before committing to anything.
What are the potential taxes when transferring your QROPS?
In the event that you intend to transfer your fund to somewhere in the European Economic Area (EEA) or Gibraltar, but will be living outside of the UK or these areas within five years of your pension transfer, you will be required to pay a 25% tax.
This may also apply if you transfer your fund to any area outside of these aforementioned locations and don’t choose to live where your pension is going to be based, though this tax can be refunded if you move to your new country of residence within five years of the transfer.
Finally, you will be taxed if the information required on your QROPS form isn’t supplied within 60-days of your transfer request, though, again, you can apply for a refund on this at a later date.
With all that being said, you won’t be charged on your pension transfer if it falls under any of the following:
- Your transfer was provided by your employer.
- You currently live in the country where your chosen QROPS is based.
What are the potential taxes when withdrawing from your QROPS?
Unfortunately, simply transferring your new pension doesn’t automatically exempt you from certain UK tax rules.
All unauthorised withdrawals from your fund, that is any withdrawal before you reach the age of 55, must be reported to HMRC for at least 10 years after the transfer is completed. Withdrawing during this time means you could be charged a 55% tax on your funds.
On top of this, even if you pass the 10-year mark, you may still be eligible for UK tax rules if you withdraw from your pension within 5 years of switching from your UK-based pension.
Tax placed upon your QROPS will also be determined by the tax rules of your new country of residence, and whether or not that country has a double-tax agreement (DTA) with the UK. A DTA prevents you from paying tax on your pension twice, so it’s best to check if they have one to avoid overpaying on your pension.
Finally, if you’re still classed as a UK resident when using the benefits provided by your new pension scheme as a form of income, said income will most likely be subject to UK tax laws.
How does a QROPS affect your lifetime allowance?
Anyone who currently has a UK pension has a maximum lifetime allowance that their pensions can reach before a 25% tax charge is levied on them; the current allowance being £1.06 million before tax applies.
Fortunately, once you transfer to a QROPS, all your funds will be protected from UK income and capital gains tax and no longer count towards your lifetime allowance. However, if you’re already over the limit when transferring, a 25% tax will be charged on the excess, after which you will be immune to the UK lifetime allowance limit.
How do you arrange a QROPS transfer?
When it comes to arranging the transfer of your current pension to a QROPS, there are several steps you will need to take, including but not limited to the following:
- Seeking financial advice – This first step is not required but is highly recommended. You want to be sure that a QROPS is the best financial decision for you to make, and that means discussing it with a qualified financial expert to pursue all your pension options.
- Check HMRC’s QROPS list – Your next step will be to validate that the QROP you’re interested in is registered on HMRC’s validated list. If not, then it’s best to look for a new one for security purposes.
- Check your pension qualifies – Although you may have already discussed this with your financial advisor beforehand, it’s always best to double-check that your pension qualifies for transfer to a QROPS before beginning the transfer process.
- Contract your QROPS provider – With all these checks complete, you’ll then need to reach out to your provider to initiate the transfer process.
- Complete the required documents – Last but not least, you will be required to complete all forms associated with your pension transfer within 60 days before pursuing the next steps with your specific provider.
Can you transfer to a scheme that isn’t a QROPS?
While a QROPS is the recommended method of transferring your pension, it is possible to transfer your fund to a non-QROPS scheme. However, this may class as an unauthorised payment, resulting in a 55% tax penalty alongside other penalties.
Such a transfer is also likely to be unregulated, leaving you open to scams and an inability to claim compensation should the worst happen.
Whether or not you opt for this type of pension transfer will largely depend on your country of residence and your own particular personal and financial situation.
But what is certain is that professional QROPS advice, such as that provided by the team at Blacktower, can help you ensure that your planning takes full account of all your financial needs.
And we don’t just offer advice on QROPS. From SIPP pensions to QNUPS, we’re well-placed to provide the financial consultation you need if you’re thinking of moving abroad. Get in touch 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.