Although around 108,000 retirement savers have transferred £8.8 billion of UK pension funds into QROPS, the rules surrounding these offshore schemes for expats keep tightening.
HM Revenue & Customs have reportedly never favoured QROPS, which were introduced by necessity in April 2006 to comply with European Union freedom of movement and capital rules.
The aim was to make retirement savings easier for expats to access across the EU, but the idea soon spread to other countries.
The latest HMRC statistics show almost a thousand QROPS are operating across 29 financial centres worldwide.
What is a QROPS?
A Qualifying Recognised Overseas Pension Scheme (QROPS) is an overseas or offshore pension that complies with HMRC’s QROPS rules and is regulated in the country where the scheme is based.
The pensions are universally known as QROPS even though HMRC rules refer to ROPS – dropping the ‘qualifying’ description.
Essentially, a QROPS is similar in to a UK self-invested personal pension or SIPP.
Who can transfer pension funds into a QROPS?
QROPS are open two categories of retirement saver:
- British expats living permanently overseas or those expecting to leave the UK for good within six months or so
- Foreign workers no longer living in Britain who have saved into a UK pension scheme
If the retirement saver returns to Britain, any benefits from a QROPS are taxed in the same way as a UK onshore pension.
Transfers are accepted from UK direct benefit, direct contribution schemes and other QROPS.
Transfers from unfunded schemes are banned – so moving a public sector or civil service pension to a QROPS is not allowed.
What is an expat?
An expat is not an official tax or pension term, but is taken to refer to someone who permanently lives in another country other than the one where they were born.
No one can opt to become an expat. Lots of rules apply to test if someone is resident in another country.
QROPS are not suitable pensions for expats temporarily outside the UK on assignment for a year or two. In most cases, a SIPP or similar pension should be considered.
Transferring direct benefit funds to a QROPS
Pension freedoms introduced by the UK government in April 2015 threw up an anomaly for QROPS as hundreds of pension savers in mainly company schemes.
Few of these schemes allow pension freedom drawdowns and many lock away cash until the saver is 60 or 65 years old.
To take their money earlier, many are looking to switch their pension savings into a UK SIPP or a QROPS, which allow access to funds from the age of 55.
At the same time, companies are encouraging executives and high earners with large pension funds to transfer out of expensive final salary schemes by offering enhanced ‘golden goodbye’ payments.
This has created a dilemma for regulators who have taken the view that any transfer from a direct benefit/final salary pension with a guaranteed inflation-linked retirement income and other enhanced benefits is a poor outcome for the saver.
That’s because QROPS in common with a SIPP and other UK personal pension give no retirement income guarantees because fund value is linked to stock market performance, while direct benefit pension benefits are linked to length of service and final salary or an average salary calculated over the years spent with an employer.
Proposed new QROPS transfer rules
Now, the Financial Conduct Authority, which regulates consumer financial services proposes to change the way direct benefit pension transfers are processed.
The FCA wants UK pension advisers to play more of a part in assessing QROPS transfers.
Instead of proving a pension transfer analysis which shows benchmarked and projected fund values, advisers will have to provide a new ‘appropriate pension transfer analysis’
The proposed changes include requiring transfer advice to be provided as a personal recommendation, and replacing the current transfer value analysis with a comparison to show the value of the benefits being given up. Taken together as a package, the proposals will ensure that advice fully takes account of an individual’s circumstances so that consumers make the right decision for them, says the FCA.
The result for expats is they are likely to need advice from both a UK and overseas adviser before a QROPS transfer from a direct benefit scheme can proceed.
The Overseas Transfer Charge
The overseas transfer charge is an exit tax on expats switching retirement funds under specific circumstances.
The tax is charged as 25% of the value of the transferred fund and is deducted at source by the provider switching the money to a QROPS.
The charge applies to transfers taking place from March 9, 2017 between QROPS as well as on transfers from a UK pension to a QROPS.
Transfer charge exemptions
Expats do not pay the overseas transfer charge if:
- The expat lives in the European Economic Area (EEA) and the QROPS is based within the EEA
So, if an expat lives in Spain and has a QROPS based in Malta, no charge is due.
The EEA is all the European Union states plus Iceland, Liechtenstein and Norway.
- The expat lives in the same country where the receiving QROPS is based
So, if the expat lives in Australia and has an Australian QROPS, no charge is due, but if they have a QROPS based in another country, they would pay the overseas transfer charge
- The QROPS is run by an international organisation to provide benefits for current or past service as an employee, for example the UN or the EU institutional QROPS.
Multinational businesses do not qualify for the exemption
- The QROPS is an overseas public service pension scheme the expat works for an employer in the scheme
- The QROPS is an occupational pension scheme and the expat works for an employer in the scheme
Who pays the overseas transfer charge
The transfer charge is not levied on every QROPS transfer – but liability is assessed each time an expat moves home to another country or transfers money to a QROPS within five years from the date of the first transfer.
Information expats must provide
HMRC will penalise retirement savers who do not provide personal details and information about their employers and pensions when they first transfer to a QROPS, move to another country or move money between QROPS
Moving money from the UK to a QROPS
Any retirement saver transferring into a QROPS who has not told the receiving scheme manager the following details within 60 days of requesting the switch of funds:
- If the QROPS is an occupational pension scheme
- If the QROPS is an overseas public service pension scheme
- If the QROPS is run by an international organisation to provide benefits for current or past employees
If the answer to any of the above is yes, then the member should also tell the scheme manager:
- The employer’s name and address
- Their job title
- When they started with the employer
- The employer’s tax reference
- HMRC’s reference number for the QROPS
- Confirmation that they know HMRC will demand a tax penalty if any QROPS transfer rules are broken
Moving funds to another QROPS within the five-year limit
If an expat who has paid the overseas transfer charge moves home to another country within five years of a QROPS fund transfer, they must tell the scheme administrator the following within 60 days:
- Their name and date of birth
- Their national insurance number or confirm in writing they do not have the number
- Their home address and, if they were UK resident for tax, the date residence ceased
- The name and address of the receiving QROPS, the country where it is based and the scheme’s HMRC reference number
- If the receiving QROPS is an occupational pension scheme
- If the receiving QROPS is an overseas public service pension scheme
- If the receiving QROPS is run by an international organisation to provide benefits for current or past employees
Where the answer to any of the last three questions is ‘yes’ the member must also tell the scheme manager:
- Their employer’s name and address
- Their job title
- The date employment started
- The employer’s tax reference
Members do not need to provide this information if all their UK related funds under the scheme:
- Were transferred to a QROPS before March 9, 2017
- The transfer charge has already been paid on the fund transfer and the member has not qualified for a repayment of the tax charge,
- The transfer charge does not apply because more than five years has passed since the transfer or because the member has used up all their relevant transfer fund or ring-fenced transfer fund.
These exemptions cover the situations where the overseas transfer charge cannot arise on a transfer between QROPS.
Expats move countries within the five-year limit
Any expat who has paid the transfer charge who moves home to another country within five years of the transfer must forward the new address to the scheme administrator within 60 days of the change.
QROPS and the lifetime allowance
The lifetime allowance is the maximum a UK tax resident can pay into a pension during their lifetime to gain pension contribution relief.
Pension contribution relief is the government pension top-up when money is paid into the fund.
A basic rate taxpayer only need pay in £80 to pick up £20 tax relief that boosts the contribution to £100.
The lifetime allowance rule for QROPS is any transfer into a QROPS for an expat aged under 75 years old is tested against the limit, but once the cash is in the fund, the lifetime allowance does not apply leaving the fund to grow to any amount without penalty.
The 2017-18 lifetime allowance is set at £1 million. From April 6, 2018, the allowance rises in line with inflation set by the consumer price index each year. The rise matches the annual increase in inflation recorded in the previous September to the start of the tax year.
Tax-free lump sums
One attraction of many QROPS is that the tax-free lump sum paid can be up to 30% of fund value, compared with the 25% cap on UK onshore pensions.
Pension freedom rules for QROPS are the same as in the UK, although providers have a choice about offering them or not.
Paying tax on pension benefits
QROPS payments are gross – which means with no tax deducted – unlike onshore pensions that are paid net of UK income tax after five years.
Tax is paid according to local rates.
So, an expat in Dubai, where no income tax is paid, typically pays no tax on the income their pension generates.
Double taxation agreements may apply in some countries.
Avoiding foreign exchange rate fluctuations
QROPS payments can be in a wide range of major currencies, such as US dollars, the euro or Australian dollars as well as Sterling.
This helps expats avoid currency exchange volatility and preserves spending power as QROPS payments are made direct to an expat denominated in a local currency.
In some cases, QROPS can help with estate planning for expats.
Unspent funds are generally outside of the reach of UK inheritance tax rules, but local death taxes may apply in some countries.
Have you been affected by the new rules? You may benefit from using a SIPP, however it is always best to seek expert financial advice first.
Written by James Barnes