Qualifying Recognised Overseas Pension Schemes
A Qualifying Recognised Overseas Pension Scheme (QROPS) is a pension scheme which is based outside of the UK, but which is still registered with HM Revenue & Customs in the UK. It basically means a pension scheme based overseas that HMRC is happy for you to transfer your UK pension into, because it believes that the scheme meets certain standards and safeguards.
These are the HMRC-approved QROPS. These schemes are primarily designed for UK expatriates.
Who can have a QROPS?
You can take out a QROPS, and enjoy all of the taxation benefits of QROPS, if you meet all of the following criteria:
- You have personal and/or occupational pension savings in the UK
- You are already living overseas, or are about to cease to be resident in the UK
- You don’t expect to become resident in the UK again during the next five years
- You haven’t so far used your pension pot to purchase an annuity
- If you have a final salary scheme, it is not already in drawdown and thus is available to be transferred to a QROPS
NB: QROPS are still available for UK residents, however, not all of the advantageous tax benefits will apply. What does still apply though is the waiver of LTA observance on withdrawal which can operate as a significant tax planning (especially Inheritance Tax planning) tool for UK residents.
Transferring to a QROPS
It’s easy to transfer funds to a QROPS from a UK personal or occupational pension scheme. However, it may not always be in your best interests to do so, especially if you are considering transferring out of a defined benefit (final salary) occupational pension scheme. Therefore, it’s a good idea to seek professional advice before going ahead with a transfer, indeed it’s a legal requirement to seek advice if you are considering transferring out of a defined benefit scheme worth in excess of £30,000.
Where can I invest with a QROPS?
A QROPS gives you considerable investment freedom. You can still invest in the unit trusts, open ended investment companies and investment trusts that are commonly offered by UK personal pensions. Alternatively, you might choose to invest in bonds, exchange traded funds, commercial property, or directly in the shares of individual companies, including those of companies not quoted on recognised stock exchanges. You can choose to manage your investments yourself, or you can let a professional investment manager take care of this.
QROPS pensions can typically be paid in a range of currencies, not just in sterling. This could be a very important safeguard for those intending to remain resident overseas during retirement, allowing them to avoid the pitfalls of exchange rate fluctuations.
Accessing funds in a QROPS
With a QROPS, you enjoy considerable freedom regarding how you access your retirement savings:
- You can still take tax free cash – indeed with a QROPS, the amount you can take tax free is 30% of the fund rather than the 25% that applies to UK schemes
- You can use your savings to purchase an annuity, but this won’t be compulsory
- You can choose to enter a drawdown arrangement and make partial withdrawals and/or take an income, while leaving the rest of the fund invested
One important thing to note, however, is that not only do you have to wait to reach age 55, but you also can’t access your QROPS and get the full 30% tax-free lump sum until you have lived outside of the UK for at least five years. If you access the plan before the five years have elapsed, you can only receive 25% tax-free.
The lifetime allowance doesn’t apply
This can be one of the most attractive features of a QROPS. It is also why many UK expatriates with the means to accumulate larger pension pots favour QROPS over other alternatives such as International Self Invested Personal Pensions.
In the UK, there is a limit known as the ‘lifetime allowance’, which is £1,073,100 in the 2020/21 tax year. The total value of all your UK pension savings shouldn’t exceed this amount, and should you end up withdrawing an amount in excess of the allowance, then significant tax penalties will be imposed.
However, the lifetime allowance doesn’t apply to QROPS, so if you are able to accumulate a seven-figure pension pot, you needn’t worry about being penalised.
What happens if I return to the UK?
If you become a UK resident once again, then your QROPS becomes subject to UK pension regulations.
Tax treatment of QROPS
There may be a 25% tax charge on transfers to QROPS, however most transfers will be exempt from this charge, given it does not apply if you are resident in the same country in which the QROPS is established; or if you are resident in a country within the European Economic Area (EEA) and the QROPS is established in a country within the EEA; or the QROPS is an occupational scheme.
The monies in your QROPS will grow free of tax.
When you come to access the plan, your withdrawals will be taxed according to the income tax regime in the country you live in. Depending on the existence of any Double Tax Agreements, you may also have a liability to UK income tax.
UK inheritance tax will not apply to your QROPS, but the local inheritance tax laws may be relevant.
Seeking financial advice
As mentioned above, it is a legal requirement to seek professional financial advice before transferring out of a defined benefit pension scheme valued at £30,000 or more. However, it’s a good idea to consult an adviser before taking out a QROPS in any case. These products are not suitable for everyone, and other retirement savings options may be more suitable for your individual circumstances. We have also seen that there is a wide range of different investment options available with a QROPS, and a skilled and experienced adviser can recommend which of these options might be best for your circumstances. For example, some of the investment options might be high risk and not suitable for inexperienced investors, or for those with a limited financial capacity to withstand losses.
Contact us today for a fee-free initial discussion to best understand how a QROPS could benefit you.
- We’re UK Qualified Chartered Financial Planners
- We don’t take any commission from any provider we use
- We use the very best investment structures and pension providers available
- None of the arrangements we use have lock ins / tie ins. Maximum flexibility on your QROPS at all times.
We look forward to hearing from you.
Chartered Financial Planner & Investment Adviser