Qualifying Recognised
Overseas Pension
Schemes
QROPS can offer significant benefits when used correctly, including larger tax-free lump sums, not being taxed at source in the UK and although there are currently plans to abolish it, avoiding taxation beyond the lifetime allowance.
The benefits of QROPS have gradually diminished over the years and cheaper alternatives with improved functionality and ease of administration are now available, so it's vital to understand which pension scheme fits your circumstances best.
We remove the risk of paying unnecessary fees and offer guidance on how to maxmise the use of QROPS, and also why you might not need one at all.
Is a QROPS Right For You?
QROPS are HMRC recognised pensions capable of receiving transfers of UK pension assets. QROPS can be useful for people living overseas that are no longer contributing to UK pensions and want enhanced pension freedoms.
Anyone considering a QROPS should note that anyone without five full tax years overseas, or expats returning to the UK with a QROPS are classed as resident with a UK registered pension scheme.
Income Tax Benefits
It is possible for QROPS to reduce UK tax on income if the scheme member has lived outside of the UK for 5 previous tax years (subject to local double-taxation agreements in their country of residence).
This does not always avoid taxation completely and income tax may apply locally and/or where the QROPS is domiciled. It is crucial to consider tax obligations where you live and where income will likely be taken as DTA's vary.
Taxation on Death
QROPS can provide protection from UK inheritance tax (IHT) for non-UK residents on death. Funds are no longer part of the member's estate in a QROPS and can be received tax-free if the beneficiaries are not UK tax resident. However, IHT rules may apply locally so it is always important to seek tax advice.
Selecting Beneficiaries
Transferring a DB pension* helps avoid pension funds being lost on death of a surviving spouse. As with an international SIPP, beneficiaries can be selected by the member who can control how remaining funds are distributed. Proceeds will be taxed depending on residency.
If it is a final salary scheme* you are transferring (aka defined benefit or DB scheme), it may be because of limited flexibility on death. A qualifying spouse is usually entitled to 50% of the benefits (sometimes rising to 66%) on the members death, but these cease on the death of the survivor (unless children remain under the age of 18 or age 21 and in full time education).
Flexible Access
QROPS, like the international SIPP, offer flexi-access to capital, providing an incentive to transfer defined benefit* pensions. Generally, DB pensions offer an income starting at age 60 or 65, correlated to the member's final salary where employer and/or employee contributed to the scheme. Income increases in line with inflation and may offer a lump sum at retirement. If so, income thereafter reduces.
Using QROPS provides access to a lump sum of 30% from age 55 and the remainder can be taken as lump-sums or income. Taking large lump-sums may put you in a higher tax bracket, so always seek tax advice locally.
Investment Flexibility
Transferring to a flexible schemes offers more control over investment decisions. It is important to note that Maltese QROPS require an investment adviser to be appointed so as always, care should be taken to ensure your adviser is suitably qualified and the assets are suitable as investment guidelines may differ from one QROPS trustee to another.
The Overseas Transfer Charge
In March 2017 a 25% tax on QROPS transfers outside specific areas was introduced by the UK's Chancellor of the Exchequer to promote fairness for members that benefitted from tax relief, but wish to take their savings elsewhere. Tax on pensions had not seen much change since 2006 and transfer requests requests subsequently dropped.
Under the new rules, unless the QROPS and the individual are in the same country, within the European Economic Area (Liechtenstein, Norway, Iceland or EEA) or is an occupational scheme from the member's employer, transfers are now taxed 25% at the point of transfer.
Following a transfer, payments from the funds within five tax years will incur tax (if for example, the individual becomes resident in a country non-qualifying for exemptions), extending the reach of HMRC. The charge is reversed if criteria for a tax-free transfer once again apply within 5 years (eg. member returns to Norway, Iceland, Liechtenstein or the EEA with a Maltese QROPS).
It is also important to consider the higher costs of QROPS compared to an International SIPP. Larger pensions can dilute the higher fees but smaller pensions will be affected more and may also be limited to a fund range selected by the trustee.
To speak to an expat financial advisor that will help guide you through a safe and secure pension transfer, contact us today and you'll get the help you need.
* If you are considering a pension transfer from a defined benefit/final salary pension scheme, be sure to seek advice from a suitably regulated advisory firm with the correct permissions in place to provide both FCA regulated advice in the UK and also overseas. Many firms outsource their defined benefit advice to third parties, we do not. Although there are many benefits to transferring from a DB scheme, it is vital you fully understand the sacrifices you are making in regard to the 'guaranteed' income you could receive.