QROPS – How Do They Work?

Category: QROPS

QROPS have been around for more than ten years. If you are working abroad and plan to retire outside the UK, there could be considerable financial and tax benefits in transferring and drawing your pension in another country via a QROPS.

These overseas pension transfers are most suitable for expats, and people who have previously worked in the UK but now live overseas. Moving your pension to a QROPS can increase flexibility over income payments. You may be able to take out a larger tax free lump sum than you would from a UK-based pension, and you’ll be allowed to receive your pension in your local currency.

Qualifying Recognised Overseas Pension Schemes (QROPS) first came into effect with the introduction of Pensions Simplification in the UK on April 6th 2006.

This was intended to streamline the process of transferring a UK pension overseas. The new rules placed more responsibility on the receiving overseas scheme into which the UK pension was being transferred.

In the Autumn Statement of November 2016, the government made a number of additional changes which will affect the tax status of QROPS.

These changes mean that if you are thinking of transferring your pension aboard it is extremely important that you take specialist advice.

The changes will affect anyone who does not plan to leave the UK long term. They are intended to prevent QROPS being misused for tax purposes. Under the new rules, the tax treatment of foreign pensions will be more closely aligned with the UK’s domestic pension tax regime. The taxation of foreign pensions and lump sums will be similar to those for UK residents.

Income from a QROPS will be taxed in the same way as a UK pension for anyone returning to the UK. In the future, 100 per cent of income will be subject to income tax, just as for income from a UK pension scheme. Previously the figure was 90 per cent.

The government is also planning to look again at the eligibility criteria for foreign schemes. This may mean that some schemes will lose the ‘recognised’ status by HMRC.

QROPS – How they work

The minimum age at which you can start to draw your QROPS is 55 (except in circumstances of ill-health).

Most QROPS pay a tax-free lump sum on retirement. Currently, in certain QROPS jurisdictions, at least 70 per cent of the fund needs to be left available to pay an income for life (although it was announced, in the Finance Bill 2016, that this requirement could change from April 2017). A lump sum of 25 to 30 per cent can be taken tax-free, compared with the UK rules which allow a maximum 25 per cent tax-free lump sum.

Like UK-based pensions, there is no obligation to buy an annuity with a QROPS and you can draw down on the fund when you need income, although you will need to think about the tax implications of doing this.

With a QROPS, any money left in your pension fund when you die can be passed onto your heirs, usually tax-free. With a UK-based pension it depends how old you are when you die as to how the proceeds can be passed on. Whether you or your beneficiaries pay tax depends on your personal circumstances.

What happens when I apply to make the transfer?

Your UK pension fund needs to be sure that the scheme into which you plan to transfer the money is indeed a QROPS and is on the list of approved schemes. It will check first before it allows a transfer to begin.

If you are under 75 then there will also be a check to see whether your pension fund exceeds the lifetime allowance for pensions savings, which for the 2016-17 tax year is £1 million.

If the total amount of your pension to be transferred is more than the £1 million lifetime allowance permitted by the UK (and there is no lifetime allowance protection on the funds), then any amount in the fund that is more than that will be taxed at 25 per cent.

Once the transfer has been approved, if your fund grows to more than £1 million you won’t be subject to the UK’s Lifetime Allowance rules if it is no longer in the UK. Nor will it be subject to UK inheritance tax charges. 

Taking advice

Although there are significant financial and tax benefits to be had from the transfer, it is important to obtain professional advice because you will need to think about issues around taxation as well as the safety and security of the regulatory regime into which you are planning to make the transfer.

Contact bdhSterling today online or by phone on +44 1372 724 249 to discuss transferring