QROPS: A Guide For Expats
In this guide, you’ll learn everything you need to know about QROPS and how it can benefit you as an expat.
What is a Qualifying Recognized Overseas Pension Scheme (QROPS)?
QROPS stands for “Qualifying Recognised Overseas Pension Scheme” and refers to pension schemes in countries outside the UK that meet certain criteria set by HM Revenue and Customs (HMRC). The government introduced QROPS pension legislation in 2006 to give greater freedom to individuals who wanted to transfer their UK pensions to a new country of residence. It is important to note that these schemes must adhere to strict guidelines set by HMRC. In essence, a QROPS is a UK-registered pension scheme for UK residents living in another country or jurisdiction. While transferring to a QROPS used to be available to anyone, anywhere, worldwide, the benefits are now only advantageous for EU residents or those who reside in a country where a QROPS has domiciled, e.g. Australia.
Who Might Use a QROPS?
The primary reason that UK citizens tend to use QROPS is to allow them access to their UK pensions if they decide to live abroad in retirement. Foreign nationals who have lived and worked in the UK might also consider a QROPS, as it’s likely that they built up a pension in their time here. If they wanted to then retire to their home country, a QROPS may present a good way for them to access any UK pension schemes they have at retirement age.
Benefits of Transferring to a QROPS
There are various reasons why pension transfers to a QROPS from a UK pension can make economic sense as per the below comparison table;
|Age Allowed to Access||55||55|
|Maximum Age to Take Benefits||75||70|
|Pension Commencement Lump Sum||25%||25%/30% after 10 years non-U.K resident|
|Annual Retirement Income||Any||Any|
|Annual Contribution limit||40,000 GBP||No limit|
|LTA Limit||1 million GBP||No Limit|
|Income Tax at Source||Up to 45%||Usually 0%|
Various Tax Benefits
In the UK, any income you take from your pension will be subject to Income Tax at your marginal rate, depending on how much money you’re receiving each tax year. Meanwhile, a QROPS will be subject to the tax rules in your country of residence. These rules may be more favourable to you, allowing you to make the most of your savings. Similarly, drawing a UK pension while abroad may see you have to pay tax in both the UK and your country of residence unless the country you live in has a double-taxation agreement with the UK government. A QROPS would mean you wouldn’t owe this tax in the UK at all, removing double taxation as a possibility.
Greater Access to Different Investments Overseas
As a QROPS is held in another country, they tend to have a higher exposure to overseas investments that might not be included by pension managers in the UK. These alternative investments can provide greater diversification to your pension holdings, offering a greater chance for investment returns. As a result, you may receive a higher pension income, depending on the performance of these investments. However, please bear in mind that these returns are not guaranteed, and you may end up with less than you invested.
Avoiding the UK Lifetime Allowance (LTA)
The Lifetime Allowance (LTA) is a limit set by the UK government on the amount of money that can be saved into a UK pension without incurring a tax charge. As of the 2021/2022 tax year, this limit is set at £1,073,100 and will remain frozen until 2026. If you exceed this limit while saving into your UK pension, you will be subject to a tax charge when you begin to withdraw your pension. If you choose to take a lump sum, you will be charged 55% tax, and if you take pension income, you will be charged 25% tax.
However, if you transfer your pension to a QROPS, which is held in other countries and subject to different tax rules, you may not be restricted by the Lifetime Allowance. This can allow you to build a larger retirement pot without worrying about these tax charges. It’s important to note that if you transfer a pension pot to a QROPS that has already exceeded the Lifetime Allowance, you will still be required to pay the tax charge of 25% above the LTA.
Less Currency Risk
If you’re living abroad, transferring your pension to a QROPS can help reduce the impact of fluctuations in currency exchange rates. This is because the scheme can pay out in the currency of your new country of residence, rather than in British sterling as a pension scheme in the UK would. As a result, using a QROPS while in another country can ensure more stability to your income.
QROPS in the European Economic Area or Gibraltar
For example, if you want to transfer to a scheme in the European Economic Area (EEA) or Gibraltar and you aren’t resident in these areas or the UK, you’ll pay a 25% tax charge. You’ll face the same 25% tax charge if you move away from the UK, EEA, or Gibraltar within five years of transferring, too.
QROPS outside the UK, European Economic Area, or Gibraltar
You’ll also face a 25% tax charge if you transfer to a QROPS outside of the UK, EEA, or Gibraltar unless you live in the country where the QROPS is based.
Losing UK Pension Benefits
A major downside of choosing a QROPS is that you may lose certain benefits that come with your UK pension scheme. For example, your current pension arrangement in the UK might have guaranteed retirement or death benefits. But, by transferring your pension to an international pension scheme like a QROPS, you will likely lose these benefits. This is often more of an issue for a defined benefit or “final salary” pensions than it tends to be for defined contribution or “money purchase” schemes. It is important to review your needs and objectives to consider which option would be best suited to you.
Higher Administration Costs
Some QROPSs can be associated with higher costs compared to UK schemes. As a result, you may see more of your retirement savings spent on costs and fees than you might if you left your savings with your UK provider.
QROPS Rules and Criteria
In order to use a QROPS, you must meet the following criteria and pension rules:
- You intend to, or currently, live outside of the UK.
- You have a UK pension (excluding the State Pension) of any value.
- You don’t intend to return to the UK for a minimum of five years.
- You have not already purchased an annuity.
- You don’t have a final salary scheme that you’re drawing money.
Alternatives to QROPSs
If you do not meet the qualifying QROPS criteria, there are other options available. A common alternative for retirement savers looking to gain more control over their retirement funds is a self-invested personal pension (SIPP). Most major investment and pension providers offer a SIPP where you can choose your own investments. However, it’s important to note that SIPPs may not benefit from the same tax advantages as QROPSs. Before opening a SIPP, it’s recommended to check with a financial advisor, especially if you live or intend to move abroad.
Should you transfer to a QROPS?
The decision to transfer your private pension overseas ultimately depends on your personal circumstances. QROPS can be a good way to access your retirement savings in a tax-efficient manner for those who want to be able to move abroad while staying in control of their pension pots. However, it’s important to consider the downsides and ensure a transfer is suitable in line with your long-term goals. Additionally, you should check whether you and your pension are eligible for a QROPS pension. If you’ve built up a private pension in the UK and now live abroad, you will likely be eligible for a QROPS.
Finding a QROPS for Expats
You can use the government’s website to check whether a pension scheme that you’re considering is an HMRC-certified QROPS. Alternatively, you may benefit from seeking professional financial advice from a specialist expat financial advisor or planner. An expat advisor can help determine whether a QROPS is a right decision based on your personal circumstances, and provide full pension planning services that take your retirement objectives into account.
Risks and Potential Drawbacks of Transferring a UK Pension to a QROPS
When considering transferring a UK pension to a QROPS, it’s important to be aware of the following risks and potential drawbacks:
- Lack of protection from the UK Financial Services Compensation Scheme (FSCS): QROPS are not regulated by the FSCS, which means that you don’t have the same protection if the scheme collapses, or the provider goes out of business. Instead, you are protected by the Malta Financial Services Authority (MFSA).
- Potential for poor investment performance: As with any investment, there is a risk that the investments held within your QROPS may perform poorly, which could impact the size of your retirement savings.
- Potential tax charges: If you exceed the Lifetime Allowance (LTA) or transfer a pension pot to a QROPS that has already exceeded the LTA, you may be subject to a tax charge.
This communication is for informational purposes only based on our understanding of current legislation and practices which are subject to change and are not intended to constitute, 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.
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