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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 5^th 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:

1. An agreement that 70% of funds will be used to provide a lifetime income and benefits are not payable before minimum retirement age. OR
2. 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.

What happens if you move abroad, and wish to transfer some of your accumulated pension contributions to an offshore pension scheme?

Her Majesty’s Revenue and Customs (HMRC) starts from the position that domiciled UK nationals who have enjoyed UK tax benefits should not be able to transfer their funds to overseas schemes which don’t have equivalent restrictions or a regulated pension scheme. However, rather than ban overseas transfers altogether or penalise them to the point that they are financially unviable, HMRC will in some circumstances treat a transfer to an overseas scheme as a recognised transfer.

The  manager of the overseas pension scheme must supply certain information to HMRC and demonstrate that they meet certain conditions. If this is done, HMRC will recognise the pension scheme as a Qualifying Recognised Overseas Pension Scheme (QROPS) and transfers to it from UK schemes will be recognised transfers.

What is a Qualifying Recognised Overseas Pension Scheme (QROPS)?

There are various regulatory checks a scheme must pass before HMRC will recognise it as a QROPS. A QROPS needs to meet the conditions to be:

1. an overseas pension scheme; and
2. a recognised overseas pension scheme; and finally
3. a qualifying recognised overseas pension scheme.

Transfers to QROPS, in general, can be performed without incurring any tax penalties under UK legislation, whereas an identical transaction to a non-qualifying, non-recognised overseas pension scheme would likely be deemed an unauthorised payment resulting in heavy tax penalties.

Overseas pension schemes

HMRC take that view that an overseas pension schemes cannot be a UK registered pension scheme, and equally a UK registered pension scheme cannot be an overseas pension scheme. Such an overseas scheme must meet the following criteria:

1. It has to be established outside the UK (‘established’ usually means where its registered office and main administration is); and
2. must be regulated as a pension scheme in the country or territory in which it’s established. If there is no body to regulate it, the scheme must be either:
3. established in the European Union or in Norway, Iceland or Liechtenstein'; or
4. the scheme’s rules must provide that at least 70% of the UK tax relieved funds will be used to provide a pension for life from the member’s normal minimum pension age; and
5. must be ‘recognised for tax purposes’ in the country or territory in which it’s established. This means it must be:
   • open to all residents; and
   • established in a country or territory where there is taxation of personal income from which relief is not available in respect of the contributions made to pension schemes or all or most of the benefits are subject to taxation or the scheme itself is subject to taxation on its income and gains and is of a specified kind* and
   • approved, recognised or registered by the relevant tax authorities or if there is no system for this, it must be able to pass the ‘70%’ rule above.

*this last way of satisfying the condition was introduced to allow Australian schemes to continue to be able to be recognised as QROPS after changes to the taxation of Australian schemes introduced on 1 July 2007. A complying Australian superannuation plan is currently the only specified kind of scheme.

An international organisation (such as the United Nations or the European Union) can establish a scheme outside the UK. To be regarded as an overseas pension scheme, such a scheme only has to meet the ‘70%’ rule and allow benefits to be paid before the normal minimum pension age only if the member is in ill-health.

A Recognised Overseas pension scheme

1. has to be established in a country which is in the European Union, Norway, Liechtenstein or Iceland; or
2. has to be established in a country or territory with which the UK has a Double Taxation Agreement that contains exchange of information and non-discrimination provisions; or
3. must provide that

•  
  • at least 70% of the funds transferred will be used by the scheme manager to provide the member with an income for life; and
  • the retirement benefits payable to the member from the transfer funds are payable no earlier than normal retirement date (unless on ill-health grounds); and
  • membership of the scheme is open to people resident in the country or territory in which it is established.

A Qualifying Recognised Overseas Pension Scheme (QROPS)

1. has to notify HMRC that it’s a recognised overseas pension scheme and have provided evidence of that if required; and
2. must promise to tell HMRC if it stops being a recognised overseas pension scheme; and
3. has to tell HMRC the name of the country or territory it’s established in; and
4. has to provide any other evidence HMRC need; and
5. has to promise to give HMRC certain information on making payments in respect of certain scheme members; and
6. must not have been excluded by HMRC from being a QROPS

Recognised transfers to QROPS

Unlike a recognised transfer between two UK registered pension schemes, a transfer from a UK scheme to a QROPS is a benefit crystallisation event. Thus if the amount of the transfer is over the relevant lifetime allowance, a lifetime allowance charge will be levied. However, because the payment is not to the individual, the rate charged is 25%, not 55%, despite the fact that it involves a lump sum. There will be no effect on the annual allowance as it isn’t a contribution (although all payments made in the pension input period up to the date of transfer will)

There are several potential problems that UK pension holders must consider before undertaking a QROPS transfer:

1. Some overseas schemes (for example schemes in the USA) may not accept the transfer value
2. The UK scheme administrator must report the transfer to HMRC (they would also have to report a non-recognised transfer)
3. The QROPS scheme manager must agree to tell HMRC when they pay benefits from the transferred fund or if they transfer the fund again.
4. Any payment or transfer which wouldn’t have been an authorised payment or recognised transfer from a UK registered pension scheme will suffer the normal tax penalties (see below)
5. A transfer to a QROPS is not a chargeable event for inheritance tax (IHT) purposes
6. The QROPS itself is not subject to IHT and therefore doesn't suffer periodic or exit charges
7. As a transfer to a recognised overseas pension scheme is a 'permitted transfer', enhanced protection will not be lost on such a transfer, including a transfer to a QROPS
8. If the transfer contains a Guaranteed Minimum Pension (GMP) or Protected Rights, there are other things the UK scheme has to do before the transfer can go ahead. It has to:

•  
  • get written confirmation from the member that he understands that the overseas scheme might not give the same degree of protection
  • take reasonable steps to check that, where the QROPS is an occupational scheme, the member is actually employed by that employer
  • take reasonable steps to check that the member has received a statement of what benefits the transfer value will provide in the QROPS.

Non-recognised transfers

A non-recognised transfer may result in the following tax penalties:

• an unauthorised member payment charge of 40% of the transfer value
• if all unauthorised payments in a 12 month period are more than 25% of the fund value, an unauthorised payments surcharge of 15% of the transfer value will be payable by the individual
• the registered pension scheme will have to pay a scheme sanction charge of 40% of the transfer value. If the scheme administrator has deducted the member's tax charge from the transfer payment and paid the tax charge to HMRC on the member's behalf, the scheme administrator may reduce the amount of the scheme sanction charge by the lesser of 25% and the amount of member's tax charge deducted as a proportion of the transfer payment
• if the amount of non-recognised transfers exceed 40% of the scheme’s assets, it could be de-registered with a de-registration charge of 40% of the scheme’s assets.

Transfers from overseas schemes

In this case, a transfer is coming from a pension scheme which is not regulated and taxed by HMRC to one that is. Almost all pension transfers from overseas pension schemes to UK registered pension schemes are allowable and treated in a similar way to recognised transfers. However a registered pension scheme isn’t obliged to accept the transfer.

Overseas transfers into registered pension schemes are not recognised transfers. However they are not unauthorised payments either as unauthorised payments can only come from UK registered pension schemes. The transfer will not count as a contribution and therefore will not get tax relief but also will not count against the annual allowance, nor is it a benefit crystallisation event (BCE) so it will not trigger off a test against the lifetime allowance at time of transfer. However it will count against the lifetime allowance when a BCE does occur, unless it comes from a recognised overseas pension scheme.

If the transfer is from a recognised overseas pension scheme, the individual’s lifetime allowance can be enhanced by the same percentage as the transfer value bears to the standard lifetime allowance at time of transfer. For example:

John has a transfer of £160,000 from a recognised overseas pension scheme during 2007/08, his personal lifetime allowance will be 10% higher than the standard lifetime allowance (£160,000/£1,600,000). This recognises the fact that the transferred funds haven’t received any tax advantages from HMRC. An individual has up to 5 years from 31 January following the tax year in which the transfer is made to claim this enhancement by registering it with HMRC. So John has until 31 January 2014 to register his claim to an enhancement to his lifetime allowance. It’s important to note that this enhancement is only available if the transfer is from a recognised overseas pension scheme – if it is not a recognised scheme, the enhancement can’t be claimed.

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.