What are Qualifying Recognised Overseas Pension Schemes?
A Qualifying Recognised Overseas Pension Scheme, commonly abbreviated to QROPS is:
- Qualifying to receive a transfer from a UK pension scheme.
- Recognised by Her Majesty’s Revenue & Customs (HMRC)
- Overseas in a jurisdiction that will adhere to certain Pension rules or has a formal double taxation agreement and exchange of information with the UK.
- Pension Scheme that is available to residents of the overseas jurisdiction.
- Simply you can move your UK Pension fund to another country.
QROPS can be attributed to EU directives which allow the freedom to move and work freely also allows freedom of movement of Pensions.
To meet these conditions a QROPS needs to fulfill several requirements (see our article on Features of QROPS)
All QROPS providers will have a letter from HMRC confirming their QROPS authorisation number.
How do I know if it’s a legitimate scheme?
- You or more importantly your adviser should check the basis of QROPS notification with HMRC.
- The regulatory controls in the overseas jurisdiction compared to the Financial Services Authority (FSA).
- Comparable consumer protection to the Financial Services Compensation Scheme (FSCS) if things went wrong.
- Who is controlling and administering your Pension fund and what is the extent of their powers within the Trust deed.
- Due diligence on the QROPS company and Trust and its Directors.
QROPS approved plans that agree to have their details published are listed on the HMRC website. (click here). This is updated every fortnight and now totals over 2000 with many more schemes not published. A UK Pension administrator will confirm a QROPS listing before agreeing to a transfer. If not listed, the administrator will contact HMRC for confirmation.
HMRC clearly states the listing of a QROPS should not be seen as a recommendation and you should always seek advice from a UK Financial Services Authority authorised and regulated firm.
What Pensions can be transferred to a QROPS?
A QROPS may be used to receive transfer values from any UK registered pension scheme.
Typically these will be:
- Occupational schemes (company pensions)
- Additional Voluntary Contributions (AVC)
- Small Self Administered Pension Schemes (SSAS)
- Self Invested Personal Pension Scheme (SIPPS)
- Personal Pensions
- Unsecured Pensions (income drawdown)
Each of these arrangements will have particular features and benefits which need full understanding and advice before any transfer to a QROPS.
Schemes that may not be able to transfer will be:
- Annuities
- Secured Pensions
Where there is no transfer value available from the administrators.
Are there minimum and maximum transfers?
There is no limit to the size of funds that may be transferred and accumulated within a QROPS. A transfer from a UK registered pension scheme to a QROPS is a “benefit crystallisation event” (BCE). A test against the individuals’ lifetime allowance (£1.75 million for the 2009/10 tax year) will be performed and any excess would be taxed.
Prior to 5th April 2009 it was possible to apply to HMRC for enhanced protection which permits a sum in excess of the lifetime limit to be transferred without incurring an unauthorised payment charge.
See also HMRC Publication: RPSM03104570 - Relevant benefit accrual: flowchart A - has relevant benefit accrual occurred? (Flowchart below)
What has the QROPS provider undertaken to provide to HMRC in the UK?
The provider has undertaken to provide information to HMRC on all benefit payments made from the plan when a member is either:
- Tax resident in the UK at the time the payment is made (or is treated as made), or
- Although not tax resident in the UK, they have been resident in the UK earlier in the tax year in which the payment is made (or is treated as made), or in any of the five tax years immediately preceding that tax year (UK).
Simply, when you have been non UK resident for five complete tax years the annual reporting by the QROPS to HMRC ceases.
Important: Most countries operating a QROPS will also have double taxation agreements with the UK. So whilst the QROPS may no longer provide the information, HMRC can request details.
What are the benefits of transferring to a QROPS?
The background to QROPS is to allow a mobile workforce and individuals to move freely without restrictions and not to have a UK Pension adversely affect their finances in their new residency.
The main reasons people who are considering being non UK resident consider QROPS are:
- Significant income tax savings and no withholding tax. All income is paid Gross.
- More flexibility on the level of income taken at retirement after five full UK tax years.
- No requirement to buy an annuity or alternatively secured pension at any age.
- On death pass the fund intact to spouse and heirs UK inheritance tax free and free of succession tax in many jurisdictions.
- No liability to future changes in UK Pensions taxation or legislation.
What is the minimum transfer?
There are no minimums on the transfer values.
What is the maximum transfer?
There are no limits on the transfer value.
Who can transfer to a QROPS?
QROPS are open to anyone who has a transferable UK Pension fund.
For individuals who are still UK tax resident they will normally be permitted do so but should have an intention to become Non-UK tax resident for any benefit.
What happens if I return to the UK?
The QROPS provider will continue to annually report any capital and income payments until you have been non UK resident for 5 complete tax years. Therefore the QROPS mirrors UK Pensions legislation until you complete the 5 years rule (if ever).
Post five years there are UK tax advantages which should be discussed with your adviser.
What Pension benefits can be taken?
The rules relating to QROPS typically boil down to two categories which the QROPS provider will adhere to:
- An agreement that 70% of funds will be used to provide a lifetime income and benefits are not payable before minimum retirement age. OR
- If there is a double taxation agreement in force that contains provisions as to exchange of information and non-discrimination then the QROPS can adopt the rules of that country’s Pension or Superannuation legislation. In many cases affording greater flexibility.
Jurisdictions such as Guernsey, Gibraltar, Hong Kong etc. have QROPS where 70% of funds are used to provide a lifetime income.
Australia adheres to the second rule which allows the whole pension sum to be paid tax free if Autralian resident.
Most QROPS plans are able to facilitate benefits via income drawdown, lump sum payments and annuities.
What age can benefits be taken from a QROPS?
If you have been UK resident within five complete tax years then UK Pension rules apply effectively preventing benefits before the age of 50 (55 from 6 April 2010).
Any benefits paid ithin five years non UK residency and not in accordance with UK Pension rules will be an unauthorised payment. The tax charges that could apply:
- Unauthorised payments charge
- Unauthorised payments surcharge
- and scheme sanction charge.
An unauthorised payment will be subject to a tax charge at the rate of 40%. The scheme member is liable for this.
The unauthorised payments surcharge must also be paid where the level of unauthorised payments made to or in respect of a member exceeds a certain limit in a year.
The limit is exceeded if all unauthorised payments made to or in respect of a member in a period of twelve months amount to 25% or more of the value of that member’s benefits under the scheme. The unauthorised payments surcharge is 15%. This is paid in addition to the unauthorised payments charge of 40%, so in some cases the member could face an effective tax charge of 55%.
What happens on death to a QROPS?
If a death benefit payment is made during the 5 year reporting period then the QROPS will report the payment to HMRC in respect of the deceased member. Any tax liability will depend on whether benefits have been taken in the form of cash and or income.
The Finance Act 2004 details the pension death benefit/lump sum death benefit rules.
Post five years non UK residency 100% of remaining funds should be paid to your beneficiaries.
Who can be a beneficiary on death of a member?
On the Member’s death the residual value is available to the named beneficiaries.
Careful planning is necessary as some overseas jurisdictions will restrict the beneficiaries and the amount they may receive.
Will a member of the QROPS Plan be liable for UK IHT?
The provisions in Finance Bill 2008 will give IHT protection to pension savings which have had UK tax relief and also to funds in QROPS Plans.
The Trust is outside of the Member’s estate and therefore IHT would not apply.
See HMRC Guidance: RPSM04100060 - Technical Pages: Taxation: Overview: Inheritance tax
It is possible that the unauthorised payment consequences could occur but this charge is only likely to be applicable during the required reporting period (5 year non UK residency rule).
Great care is needed in some overseas jurisdictions and detailed advice should be sought in all cases. Whilst UK Inheritance tax may be avoided some jurisdictions may impose their own succession taxes either on the member or the recipient beneficiaries.
Can I cash-in my QROPS Plan in full?
The legislation covering QROPS does allow for encashment, and is considered as a member payment, which may give rise to a member payment charge, if the member has been non UK resident for less than five complete UK tax years.
Post five years non UK residency then the provisions of the Finance Act 2004 no longer applies and no UK tax is imposed on encashment.
Whilst sometimes seen as controversial the single largest number of authorised QROPS that exist and have received transfers from the UK is Australia which allows 100% of the fund to be received tax free.
Care though as many QROPS providers have given an undertaking to use 70% of funds to provide a lifetime income and must adhere to this or lose their QROPS status.
Glossary
A Member Payment
A member payment is payment or a deemed payment to a member from a QROPS plan which could be either the first instalment of a series of pension payments or other non-pension payment such as a lump sum or transfer whilst the member is either:
Resident in the UK when the payment is made (or treated as made); or
Although not resident in the UK at that time, has been resident in the UK earlier in the tax year in which the payment is made (or treated as made) or in any of the five tax years immediately preceding that tax year.
See HMRC publication: RPSM14101070 - Technical Pages: Transfers: Recognised transfers from registered pension schemes: Reporting requirements on transfer to a qualifying recognised overseas pension scheme
GMP
GMP stands for guaranteed minimum pensions and has the same meaning as in the Pension Schemes Act 1993.
Alternatively secured pension
Alternatively secured pension Payment of income withdrawals direct from a money purchase arrangement to the member of the arrangement (who is aged 75 or over) and that meet the conditions laid down in paragraphs 12 and 13 of Schedule 28 to the Finance Act 2004.
Enhanced protection
Enhanced protection is a transitional arrangement for members of approved pension arrangements whose total pension benefits as at 5 April 2006 either exceed the lifetime allowance for the 2006/07 tax year of £1.5m or whose benefits are likely to exceed the lifetime allowance applicable when they retire.
By registering pension benefits for enhanced protection by 5 April 2009 individuals can prevent a lifetime allowance charge of up to 55% applying to any benefits which exceed the lifetime allowance. The key stipulation in registering for enhanced protection is that no further pension savings can be made after 5 April 2006 or enhanced protection will be lost. Broadly speaking, for a defined contribution arrangement, pension savings are made where a contribution is made after 5 April 2006. In general terms for a defined benefit arrangement the value of an individual’s benefits is permitted to increase between 5 April 2006 and the date of taking benefits by the greatest of 5% per annum or RPI.
Impermissible transfer
A transfer, or other action, that is defined as an impermissible transfer will cause enhanced protection to be lost. Broadly speaking an impermissible transfer is a transfer of sums or assets from an arrangement under a registered pension scheme not relating to the individual, a transfer of sums or assets which were held otherwise than by a pension scheme or the payment of a transfer lump sum death benefit into the arrangement. Please see the following link for further information -
See HMRC Publication RPSM03104097 - Technical Pages: Protecting pension rights from tax charges: Enhanced protection: Cessation: Impermissible transfers
Permitted transfer
Enhanced protection will be lost when a member transfers benefits which have enhanced protection, unless the transfer is a permitted transfer. Generally speaking, a permitted transfer is one where all benefits in the arrangement are transferred to one or more defined contribution arrangements and the benefits have the same actuarial value before and after transfer.
Relevant Benefit Accrual Flow Chart (click picture for larger version)
HMRC Publication RPSM03104097 - Technical Pages: Protecting pension rights from tax charges: Enhanced protection: Cessation: Impermissible transfer – has a relevant benefit accrual occurred?
Important Notes:
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.
In addition, the information provided is also based on our current understanding of the relevant Finance Acts.
Pension investment values and income arising from them can fall as well as rise.
This information does not constitute advice and we cannot accept responsibility for its interpretation or any future changes to law. Any advice and recommendations will be given in writing.
