What are QROPs?
Quite simply, QROPS are pension plans that:
Qualifying with HMRC rules and are officially…
Recognised by HMRC as being…
Overseas i.e. outside of the UK and set up in trust as legal…
Pension
Schemes
…hence the acronym QROPS.
A QROPS therefore, can accept a UK pension transfer just like any UK based scheme. The benefits of transferring your fund into a QROPS include increased tax efficiency, flexibility, total investment freedom and large growth opportunities – to name just a few.
For most people, their pension is probably their second most valuable asset after their family home, so benefits really make a big difference, and can dramatically improve life in retirement.
Download HMRC’s most up to date list QROPS
Around 300,000 to 500,000 Britons leave the UK every year to start a new life overseas. The big demand for overseas pension benefits is the key reason behind the birth, development and refinement of QROPS and many thousands of expats have transferred their UK pension into a QROPS since the schemes were launched. Because of the potential benefits to be derived from transferring a UK pension abroad, this demand shows no sign of slowing.
The capacity for QROPS to simplify an individual’s retirement has assisted as well. With a QROPS, it is much easier to switch from out-of-date arrangements, and consolidate a number of pension schemes under one roof.
Please note you cannot transfer a UK state pension or an annuity into a QROPS.
How did QROPS come about?
UK pension schemes have traditionally been restricted by many limitations and regulations; partly to protect UK’s tax revenues, and partly to stop pensioners from spending their money too early in retirement and later relying on the UK Government for income.
In 2006, HMRC embarked on an initiative to simplify pensions. Contained within this initiative was the announcement that British pensioners living overseas could move their pension fund into a QROPS – or Qualifying Recognised Overseas Pensions Scheme.
Part of the reason for this action came as a result of pressure from the EU, to allow EU nationals a “passport” to their pensions within the EEA, which the main EU member states had already agreed to. HMRC recognised that many Brits were working and retiring outside of the EU, and therefore, there was a need to establish a set of rules to permit these individuals to transfer their pensions overseas. QROPS allows HMRC to retain control over UK pension transfers by preventing transferees from drawing their entire pension and spending it, or avoiding tax altogether subject to tax treaties.
While in simple terms QROPS are any pension scheme based outside of the UK that meets these strict HMRC rules and is eligible to receive UK pension transfers, some QROPS jurisdictions provide many other financial and investment benefits to pensioners. These include improved investment freedom, and the ability to pass on 100% of their fund to loved ones upon death, tax-free.
It is worth noting that in a great many countries, their QROPS are more restrictive than HMRC are on UK pensions. However, a feature of QROPS is that HMRC allows UK pension scheme members to choose a QROPS from their preferred jurisdiction, and this does not need to be in the country where they live or intend to live.
Obviously, it is important to choose a QROPS in a jurisdiction that would provide you with the greatest possible benefits. As UK pension legislation changes and evolves over time, some schemes, or jurisdictions have been delisted by HMRC for not following QROPS rules – they are now classed as non-qualifying.
Before you commit to transferring to an overseas pension scheme, you need to ensure that you consult with a qualified pension advisor who can give comprehensive advice about the rules for where you intend to retire and which QROPS jurisdictions qualify you for the best possible benefits.
During the Budget of 2015, the Chancellor placed specific emphasis on reforms to the UK pension system, allowing for more freedom in the drawdown of UK pension scheme benefits. However, as with many reforms, the precise implications for ex-pats and their pensions are still not understood and are currently under consultation by the UK Government. Irrespective of the legislative changes, a QROPS will always be able to offer certain benefits that the UK pension scheme would not be able to deliver to retirees.
What are the Benefits of QROPS?
QROPS offer some important advantages that no other type of pension scheme can give you.
These include:
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Lump-sum benefits
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Avoid Inheritance Tax of up to 55% and easily pass on your wealth
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Greater freedom of investment choice
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No requirement to purchase an annuity
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Superior tax-efficiencies
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Reduced currency exchange risks
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No Lifetime Allowance (LTA) charge
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Transparency of fees and charges
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Ability to base your pension where it gains the best tax efficiencies
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Combine several pensions into one easy to manage scheme
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Avoid changes to UK tax and pension legislation and protection from creditors
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.
Avoid Inheritance Tax of up to 55% and easily pass on your wealth
When you set up a QROPS, you nominate your beneficiaries (which you are entitled to change at any time), so that means you can pass on your wealth to loved ones far easier, faster, and less stressful for your family than with you can with a UK pension. 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.
Another massive benefit to passing on your wealth through a QROPS is the fact that your family and loved ones will completely and legally avoid paying the Inheritance Tax (IHT for short) which is levied on UK pension schemes. This can be up to 55% of your pension’s fund value!
Inheritance Tax (IHT) is calculated on your entire, worldwide assets if you are domiciled in Britain, even when you are resident overseas. If HMRC can establish Britain was the country you regarded as home at the time of your death, your UK pension would be subject to IHT.
Speak to an expert about QROPS
If you have a UK pension, these funds will incur an IHT charge of up to 55% when they are left to your beneficiaries. IHT does not apply to QROPS, so you can be sure the money you have worked your entire life for can be passed onto your loved ones free from tax at source.
Greater freedom of investment choice
QROPS offers greater flexibility over UK pension plans in their scope of investment choice. A UK stakeholder pension scheme tends to have low fees, but that’s because the scheme only offers a limited very choice of unit trusts and investment funds. Most of these funds are in-house versions of certain external mutual funds, and thus the life companies offering these schemes tend to make their money at the fund level rather than at the pension scheme level. On the other hand, old-style UK personal pensions tend to offer a wider selection of funds than stakeholder pension schemes but can carry substantial charges.
Many people do not know that their UK pension is run by a life assurance company, but this is indeed the case with the vast majority of UK pensions. Rather than giving investors the freedom to choose an investment from the entire market, the life assurance companies choose a limited selection of funds that are representative of the various different investment asset classes or sectors.
Without wanting to delve too deeply into the investment side of things, let me provide you with a short example. Let’s assume for whatever reason, that you wanted to have exposure to the US stock market in your pension fund. A UK pension from a life assurance company may have a selection of a few US equity funds to choose from. The chances are that these funds are not consistently the top-performing investment funds in the world. With a QROPS you are not faced with these limitations. You or your financial advisor can go and search for the top-performing fund in the top-performing sector from any regulated fund in most regulated markets across the globe.
Likewise, most traditional UK pension funds cannot directly hold stocks, bonds, money market funds, exchange-traded funds, exchange-traded commodities, real estate investment trusts, futures, options, commercial property, classic cars… the list goes on! QROPS can hold all of these and much, much more.
Another concern for anyone living outside the UK is currency risk. You would find your investment choice severely restricted or blocked altogether if you wished to invest in a different currency, say Euros for instance.
So if you require access to the best fund managers in the market and an unparalleled variety of asset classes, a QROPS gives you this freedom.
QROPS offer you a broad selection of investments, allowing you, your financial advisor, or a discretionary manager to pick investments from a range of asset classes across the global market and maximise your growth prospects.
No requirement to purchase an annuity
In the past, 75% of the funds a person saved up in their UK pension pot had to be used to purchase an annuity from a life assurance company. An annuity provides guaranteed income for the rest of your life in exchange for a one-off payment (your pension pot).
The downside is that annuity yields are and have been historically low in recent years. If you are in good health, or wanted to retire early this is especially true, since the life assurance company bases your annuity rate on your life expectancy and the number of years you are likely to live in retirement. The income that you would receive from an annuity would also be subject to tax and when you die your annuity dies with you. Imagine what would happen if you die early?
Many older UK pension schemes automatically default into an annuity at a given time.
If you transfer your UK pension into a QROPS, this danger is avoided, and upon death any money that you have not taken as an income will be passed onto your loved ones free of tax.
Superior tax-efficiencies
A lot of countries impose lower taxes on income than the UK. This includes income on your pension. For example, at the time of writing, Gibraltar only levy 2.5% income tax on pension income benefits. If you were a higher rate tax payer under HMRC rules and you moved your UK pension scheme to a Gibraltar QROPS the tax savings you could achieve would be enormous!
Depending on where you are residing and the jurisdiction of your QROPS, you can potentially pay far less, or even no tax on your pension income. If double tax treaties are in place then you have the choice to elect to pay tax in country where you reside, or the country where your QROPS is located. Obviously, you would opt for the better of the two choices. If no tax treaty is in place then you would normally default to paying tax in your QROPS jurisdiction. This is why to maximize your tax positions it is vitally important to speak to a qualified pension advisor.
Get more information on Double Tax Treaties
Reduced currency exchange risk
If you have UK pension it will pay you an income in sterling irrespective of where you live. This causes many people retiring abroad with either complicated timing issues to make the best of changing currency rates, or having to take a hit from time to time when exchange rates are unfavourable. Whatever the exchange position you still have the additional costs of currency conversion.
Not only that, but if you are already outside the UK, do not earn pounds, and do not intend to return to the UK, there would be little reason to speculate on investments that were denominated in sterling. With QROPS you could just as easily invest into and hold assets in any major currency. Obviously, that would be the currency of your choice, rather than you being restricted to hold your pension funds in pounds.
No Lifetime Allowance (LTA) charge
In the UK, there is a maximum amount of money that an individual can invest into a pension and still receive tax relief. This maximum limit is referred to by HMRC as the Lifetime Allowance (LTA). At the last Budget, the Chancellor set the Lifetime Allowance at £1,073,100. This applies to the total value of all your pensions.
If your pension fund exceeds the allowance you could be hit with a 55% charge on the excess. While £1,000,000 may sound like a lot of money to most people, many people in defined benefit (final salary) schemes may be reaching this threshold without even knowing it.
What is also worth considering is that one cannot just stop paying into their pension once they reach the threshold to avoid the tax, since their investment value will likely continue to grow. Therefore, they could be hit with a tax on the incremental amount every year that there investment grows to take them over the limit.
One key benefit to transferring a UK pension to a QROPS is that pension funds will not be taxed, even if they grow past the LTA threshold after the transfer takes place. This presents a great opportunity for people who are approaching the threshold or believe they will do so in the not too distant future. Unfortunately, this does not extend to those who are already above the threshold. They cannot escape the tax charge and would be hit with a tax on the incremental amount over when making the transfer to a QROPS.
Transparency of fees and charges
Traditional UK pension schemes tend to have confusing charging structures, most of which are implicit in that they happen behind the scenes. These charges cause a large drag on your investment performance. These charges can put a serious dent in your retirement fund.
By transferring your UK pension into a QROPS, the QROPS will ask your financial advisor to sign a tariff of charges which will clearly outline any and all costs relating to your QROPS scheme. Many UK schemes charge a percentage fee, whereas QROPS normally quotes a fixed fee starting from as little as £180 per year.
Please note that with reference to the above we are referring only to the QROPS charges. There are likely to be other charges relating to the investments and their management, plus transactional charges. Be aware that many offshore financial planners make substantial commissions by adding multiple layers of charges into investment proposition.
We strongly advise you to shop around and get a second opinion on any investment proposal that you have received. Many financial advisors in the offshore market are not properly qualified to advise you on investments or pensions. Ensure that they are suitably qualified and their investment recommendations are properly regulated in a major economy, such as the UK. Regulation in these countries ensures transparency and provides security, recourse, and compensation should something go wrong.
Ability to base your pension where it gains the best tax efficiencies
When you transfer your UK pension into a QROPS, as we mentioned in our notes on tax advantages, you can either take advantage of the tax rules where you live – or a different jurisdiction that provides better benefits (lower taxes).
For individuals who might move between countries, intend to move in the future, or just don’t know where they will end up, many QROPS trustees offer schemes in multiple jurisdictions. These schemes allow you to freely switch your QROPS between jurisdictions to maximise its tax efficiency.
Combine several pensions into one easy-to-manage scheme
It is fair to say that most people accumulate contributions into more than one UK pension over the period of their working lives. It can be challenging to keep tabs on how individual pension plans are doing when there are a number of plans to manage. This becomes even more confusing in retirement, especially if you are abroad, when you may have income coming from several different sources, at different frequencies, and at different times throughout the year.
Smaller pension pots are likely to be eroded by more charges relative to bigger pension funds, so there are also likely to be economies of scale to be gained through consolidation.
With a QROPS, you can merge any number of UK pension funds into one, easy-to-manage pension plan. By doing so it does not mean putting all your eggs in one basket since you can benefit from enhanced investment choice, plus you will save money on charges and maximise your growth prospects.
“By consolidating multiple pensions into one pension fund you can save on charges and maximise growth.”
Avoid changes to UK tax and pension legislation and protection from creditors
When you transfer to a QROPS, your pension pot is will then be unaffected by the ever-changing rules and regulations that affect pensions in the UK. This includes the likelihood that before long, the ability to transfer your pension fund into a QROPS could itself be scrapped altogether.
QROPS members can also benefit from the advantage of increased protection against possible future creditors – depending on your QROPS jurisdiction – and greater confidentiality than if you left your pension in the UK.
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.
Who is eligible for a QROPS?
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:
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A UK national moving to an EU country
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Any citizen who has built up UK pension benefits and is now resident or intending to become resident in the EU
Qualification for a UK pension transfer to a QROPS
To qualify for a QROPS, an individual should fulfil the following criteria:
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He/she must be between the ages of 18 and 75 years.
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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.
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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.
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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:
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Personal Pensions
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Final Salary Pensions
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Money Purchase Schemes
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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:
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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.
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Any pension that has already made a distribution from a ‘final salary scheme’.
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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.
Which QROPS Jurisdiction is best for me?
Basically, a QROPS jurisdiction is the country where your UK pension can be transferred to. QROPS schemes may be formed in these countries to take advantage of the favourable tax rules (e.g. Malta, Gibraltar, the Isle of Man), or simply because there are many British expats living there (Australia, France, Ireland). The latter tend not to present any major tax advantages over the UK and in some cases are more punitive. The former (Malta, Gibraltar, the Isle of Man), are currently growing from strength to strength as expats learn more about the opportunities these locations present and race to transfer to such favourable tax regimes before the UK puts a stop to it all.
Malta, Gibraltar, and the Isle of Man are known for their financial stability and favourable tax. However, because fiscal laws vary from country to country, one QROPS does not fit all – and expert advice is needed to decide which jurisdiction is the best for your needs.
Find the best QROPS Jurisdiction for your country of residence (or residence in retirement)
One key factor in deciding which QROPS jurisdiction is right for you is where you plan to retire in the future. If you live in France, for example, a Malta QROPS may be the best option due to the direct tax treaty between the two countries – meaning you would not pay income tax twice. If you live in Thailand however, a Malta QROPS would not be appropriate – as there is no direct tax treaty and you would be hit with their highest rate of income tax - a hefty 35%! Instead, a Gibraltar QROPS may be the best option, as Gibraltar offers a low, 2.5% tax on pension income wherever you are based.
This simple example hopefully demonstrates some of the complexities one might encounter; just staying up to date with the multitude of QROPS jurisdictions, opportunities and pitfalls is an enormous task, which requires the attention of a trained professional. This is another reason that you should always seek advice from a properly qualified financial advisor before making any decisions. Every jurisdiction has its own criteria to consider, but this is complicated by the interactions of the rules and regulations between these jurisdictions.
Maintaining flexibility and selecting a trustee that provides access to multiple QROPS jurisdictions and free switching between them is also, in our opinion an important consideration.
Download our free PwC tax guide on QROPS jurisdictions and where you should transfer your pension to maximize the tax advantages in the country in which you plan to retire.
Warning - QROPS and the US
Careful consideration needs to be taken if you are a USA resident or planning to retire in the US. Many QROPS cannot be used as the QROPS jurisdiction is not compatible with USA laws. This may mean you are hit with higher taxes. Due to these additional financial complexities, many advisers choose not to deal with American citizens and residents who hold a UK pension. However, due to the Double Taxation Treaty between the USA and Malta, there is a solution available, however, you must find a financial advisor in the US who is suitably qualified, in order to help you put these arrangements in place.
Will I face a tax charge?
I’ve been scratching my head and trying to think of the benefits of the new UK tax on pension transfers overseas to the UK exchequer. Almost everywhere I look I see either exceptions to the rule, unfair taxation and future financial insecurity. To recap, the Chancellor recently introduced a UK tax on pension transfers overseas; this includes transfers to QROPS. The tax is a staggering 25% of the pot. Exceptions were thankfully made for individuals living in the same country that the pension scheme is transferred to, and where both the individual and the scheme are resident in the EEA.
There are gaps in the legislation
It may be coincidental, but the UK signed a Dual Tax Treaty (DTT) with the UAE at the end of 2016. The treaty stated that pensions transferred out of the UK on behalf of people living in the UAE could be accessed tax-free. It may seem unfair that individuals can profit in this way, given that they have already benefited from tax relief on pension contributions in the UK. Tax relief has primarily been about encouraging people to save for their retirement via pension plans. There is indeed a ‘quid pro quo’ in that relief is retrieved as pensions are taxed on retirement. In the case of the UAE, being able to access your UK pension via an international Self Invested Personal Pension(SIPP), as opposed to a QROPS, allows individuals to benefit from tax relief at both ends.
The UK/USA DTT
The situation becomes more complicated when we examine DTT’s further afield. For example, the UK/USA DTT states that pension benefits should be taxed/treated in the country a person retires in the same way that they would be treated in the country of accrual. As such, if someone were to build up a pension in the UK, then retire to the USA and transfer to an overseas US$ environment, he/she would be able to take the 25% Pension Commencement Lump Sum tax-free in the USA. The new overseas transfer tax appears to contravene this rule. Presumably, the Chancellor has made arrangements to make this new tax an exception to the DTT. Who knows? The industry wasn’t consulted, and no one has any idea whether this sort of predicament was considered.
Issues relating to the Lifetime Allowance
The danger for anyone in the above situation is that they might feel forced to leave their pension in the UK, in Sterling, and accept the inherent currency risk that this creates. Transferring to a SIPP would be a possible solution. However, this can cause other concerns, in that the individual will not escape the Lifetime Allowance (LTA) tax charge if either the fund is more than £1,073,100 or grows to that value in the future. To make matters worse, there is the possibility that the UK government may decide to reduce the level at which the LTA is payable even lower. They, unfortunately, have a track record on this issue, as the LTA has gradually been eaten away from a high of £1.8m to the present level.
Brexit and the value of Sterling
It is difficult to know what will happen to Sterling now that Article 50 has been triggered and Brexit negotiations are about to start. The markets appear to have factored in a weak pound at the moment. The future direction of Sterling will likely be linked to the outcome of Brexit and the reaction of the UK economy to it. Most retirees prefer to receive benefits in the currency they use from day-to-day. The choice of currency is, therefore, as important an investment decision as asset allocation.
Tax on pension transfers overseas and the 5-year rule
There are also concerns for those who transfer their fund to an EEA country and thereafter move to a country outside of that area within five years of the pension transfer. Such a decision could be made as a result of a new job, a new partner, or a desire to be closer to family. However, the initial transfer of a pension overseas would have been done in good faith and under the assumption that no new taxes would be charged!
When people talk about the five-year rule they are referring to the length of time the member has been resident outside of the UK for tax purposes. This is measured in tax years (and not calendar years).
The five-year rule is important because it determines when QROPS benefits can be taken. During the first five years, retirement benefits must mirror those available in the UK, e.g. a pension commencement lump sum (often referred to as the tax-free cash) of 25%, and 55% inheritance tax on the value of a pension fund on death after retirement.
Once a pension scheme member has been a non-UK tax resident for five full tax years, if they transfer, or have already transferred to a QROPS this pension follows the rules of its jurisdiction. People who have completed the five full tax years will not be subject to any UK income tax or inheritance tax and will be able to access the whole host of other benefits that are detailed below.
When you transfer your UK pension fund into a QROPS it means you can enjoy the best of both worlds – you can receive tax relief whilst saving for your retirement in the UK, at the same time as paying less, or no tax (depending on where to live and the jurisdiction you choose to take your QROPS from) and gain greater flexibility when the time comes to drawing your pension benefits overseas.
What is the process to transfer to a QROPS?
Below is a basic map of the process one needs to undergo to transfer a UK pension scheme to a QROPS. In many respects the process is not very much different than transferring a pension to another UK scheme. The times are just a guideline based on a typical QROPS application, since many of the delays in that occur arise due to the time it takes for a UK pension provider to pass on information to your financial advisor.
First week
You make an initial enquiry to a financial advisor
Your advisor sends you a Letter of Authority to complete – so they can speak to your current pension provider on your behalf. You email or fax the Letter of Authority to your financial advisor and send the original (sometimes just a scan or fax will suffice). Your financial advisor will forward this to your pension scheme provider, together with requests for any other specific information about your pension. Most financial advisors do not charge for this.
Note: A Letter of Authority is an authorisation from you which allows your financial adviser to obtain information about your UK pension. This letter is not binding in any way and does not constitute an authority to make changes to or transfer the scheme.
2-4 weeks
Your existing pension provider will provide your financial advisor with a statement of your current benefits and a transfer valuation.
Final Salary Schemes
Warning: If your pension is a final salary scheme financial advisor should obtain a pension transfer analysis report from a qualified third party pensions technician. This report calculates the minimum amount of growth your transfer value will need to achieve each year to match your final salary benefits. This figure is called the “Critical Yield” and it is actually pretty critical. If a financial advisor attempts to persuade you to transfer your pension without showing you a critical yield calculation this should set alarm bells ringing immediately.
5-8 weeks
Your financial advisor helps you choose a QROPS product and a jurisdiction that best fits in with your current situation or objectives and you complete the application forms.
A discharge form is sent to your existing pension scheme provider, and an application form is sent to the chosen QROPS provider.
Your pension is then transferred into the QROPS and you will instruct your financial advisor to invest the funds as per your agreed mandate.
How do I take benefits from a QROPS?
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:
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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.
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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.
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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%.
How much does a QROPS cost?
Most QROPS fees are fixed monetary amounts, rather than a percentage and usually consist of a set-up fee and an annual fee. There are usually other fees for incidental transactional costs such as reprinting a valuation or making an ad-hoc payment to your bank account. The fees involving setting up and maintaining your QROPS can vary widely. There are hundreds of schemes on the market and all provide different product offerings so to give a definite indication of fees could be misleading.
At the time of writing, there are basic schemes which can be used for as little as £180 a year. There are also very complex schemes for US residents charging upwards of $3,000.
As a result of market competition, QROPS are not as expensive as they once were but there are still a lot of expensive schemes that offer no added value over other less expensive providers, so it is worth shopping around or at least having your financial advisor give you some comparisons.
Bear in mind that with respect to the above we are referring only to the QROPS charges. There are likely to other charges relating to the investments and their management, plus transactional charges. Be aware that many offshore financial planners make substantial commissions by adding in multiple layers of charges into an investment proposition.
We strongly advise you to shop around and get a second opinion on any investment proposal. Many financial advisors in the offshore market are not qualified or licensed to advise you on investments or pensions. You should ensure that they are suitably qualified and their investment recommendations are properly regulated in a major economy, such as the UK, US, or Europe. Regulation in these countries ensures transparency and provides security, recourse, and compensation should something go wrong.
What other things should I consider?
QROPS are not right for everybody. However, for most UK pension holders a QROPS can be significantly beneficial, so long as the following factors are considered carefully:
There can be less regulation and investor protection
Your QROPS must be set up in an approved QROPS jurisdiction, but your pension pot can be invested in financial products anywhere in the world. There are some countries where less protection is provided than in Britain. This may mean that there is little or no recourse or compensation if something goes wrong. This lack of regulation can open up opportunities for companies selling unlicensed, unregulated, and high-risk investment products and schemes.
Many companies target UK expats selling investment products without explaining their true risks and implications. Implications can include extortionate charges and penalties for cancellation as well as no liquidity and no reporting obligations or compliance procedures.
Always make sure that your advisor is suitably qualified and that the products they recommend you invest into are regulated in a jurisdiction that has proper regulatory compliance practices in place. Such jurisdictions include the UK, US, Channel Islands, Switzerland, and the EU member states. There are ombudsman schemes for investor recourse and compensation schemes for regulated financial services products in these locations.
Remember, just because the investment is in an investment scheme in a highly regulated country, it does not mean that the product itself is regulated. Therefore insist that any product recommended to you is regulated in that jurisdiction and ask for proof of this to avoid any doubt. For Example, investments in land in Costa Rica, shipping containers in Hong Kong, self-storage units in London, or commercial property in Detroit promising income of 18% per year, all exist and are heavily marketed to expats by companies in the UK. Investments like these are unlikely to be regulated. That is not to say that investors cannot choose to invest in these products if they want to but merely that they should be aware that investment schemes like this are very high risk and illiquid and should you choose to put your money in this type of investment, you should limit the amount to a small portion of your total pension pot.
The best advice is to use common sense, be vigilant, use regulated financial products, and remember the adage; if something sounds too good to be true it probably is.
There could be issues if you choose the wrong QROPS jurisdiction
It could be possible that the wrong jurisdiction is selected for you. One key factor in deciding which QROPS jurisdiction is right for you is where you plan to retire in the future. If you live in France, for example, a Malta QROPS may be the best option due to the direct tax treaty between the two countries – meaning you would not pay income tax twice. If you live in Thailand however, a Malta QROPS would not be appropriate – as there is no direct tax treaty and you would be hit with their highest rate of income tax - a hefty 35%! Instead, a Gibraltar QROPS may be the best option, as Gibraltar offers a low, 2.5% tax on pension income wherever you are based.
Just this simple example hopefully demonstrates some of the complexities one might encounter; just staying up to date with the multitude of QROPS jurisdictions, opportunities and pitfalls is an enormous task, which requires the attention of a trained professional. This is another reason that you should always seek advice from a properly qualified financial advisor before making any decisions. Every jurisdiction has its own criteria to consider, but this is complicated by the interactions of the rules and regulations between these jurisdictions.
Maintaining flexibility and selecting a trustee that provides access to multiple QROPS jurisdictions and free switching between them is also, in our opinion an important consideration.
Find the QROPS Jurisdiction for your country of residence (or residence in retirement)
Will QROPS be around in the future?
Transferring to QROPS lets UK expats accumulate substantial pension funds with tax relief throughout their working life then later avoid paying British tax on pension income in retirement.
These benefits are very generous and there is a concern among expats in the financial planning industry that QROPS are simply too good to last. It is quite likely that HMRC may decide to alter or completely remove QROPS (as happened with the delisting of Singapore’s schemes) in the future.
What is the next step?
Pensions are complex and confusing, so it pays to take expert advice. To help with this, Global has teamed up with a number of leading QROPS trustees and UK-based private banks and wealth managers. Please feel free to get in touch with us in order to help understand the most suitable QROPS based on your location and requirements. In addition, we will only ever transfer your pension fund into a QROPS which is 100% approved by HMRC.
If you would like the benefit of a free initial consultation, a qualified financial advisor will help you gather information about your UK pension and supply you with a full report on the QROPS solution which is right for you. The report will include expert financial advice regarding your current UK pension benefits, a critical yield analysis, a breakdown of the jurisdiction which best matches your needs, and your optimal QROPS solution.
Remember, there are many different QROPS on the market and there is not a “one size fits all” QROPS. Getting the correct and the best advice is the first step to creating a more flexible and happy retirement.