QROPS And The UK Lifetime Allowance

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On the 6th April 2006 (A-day) major changes happened to UK pensions as a result of Pensions Simplification. Amongst the changes introduced were QROPS (Qualifying Recognized Overseas Pension Schemes) and the pension lifetime allowance. Broadly speaking, QROPS are overseas pension schemes that have been registered and approved by the UK Her Majesty’s Revenue and Customs (HMRC) to accept transfers of UK pension funds. The lifetime allowance, basically, is a tax allowance that limits the amount of tax privileges on an individual’s total UK pension benefit over their lifetime. It was set at £1,500,000 in tax year 2006/07 and will increase to £1,800,000 by 2010/11.

Each time an individual brings new benefits into payment under a UK pension scheme it is known as a benefit crystallization event (BCE). Each time benefits are taken, the ‘crystallized’ value of the benefits must be tested against the individual pension member’s available lifetime allowance.

How does this affect someone looking to transfer to a QROPS scheme? In short, a transfer of a UK pension fund to a QROPS is a BCE. If the crystallized value of the pension funds are above the remaining lifetime allowance available, a lifetime allowance tax charge will apply to the excess amount.

In some cases, such as when an individual can apply for enhanced protection, a UK pension fund value above the lifetime allowance can be transferred to a QROPS without penalty. However, an individual, who has funds approaching the lifetime allowance would, be wise to take specialist advice before transferring to QROPS.