Qualifying Recognised Overseas Pensions Schemes (QROPS) – When Did They Originate?

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Qualifying Recognized Overseas Pensions Schemes (QROPS) were first introduced, in UK legislation, in section 169(1)(b) – under “Recognized Transfers” – of the Finance Act 2004.

It was the Finance Act 2004 that introduced many of UK pension changes that were to form the basis of Pension Simplification that commenced on A-Day, 6th April 2006, the same date as the new UK pension to overseas pension transfer rules (known as the QROPS rules) came into effect.

What were overseas pension transfer rules pre A-Day?

Before A-Day, if an individual wished to affect a UK to overseas pension transfer, they would have to meet the UK Her Majesty’s Revenue and Customs (HMRC) – formerly the Inland Revenue – requirements.

The UK to overseas pension transfer requirements, pre QROPS, were set out in IR12 Appendix IV for occupational pensions and IR76 Appendix 22 for personal pension schemes.

The rules for the UK scheme, for an overseas pension transfer to take place, stipulated that:

-No part of the UK scheme had already come into payment,
-Transfers are made directly from a UK scheme to the overseas scheme,
-The pension funds do not exceed the maximum approvable benefit,
-There was no outstanding loan on the scheme and;
 -The DWP contracted-out rules were followed.

In addition to the above UK pension scheme stipulations, pre-QROPS, the individual transferring would have to provide the following evidence:

– A declaration from the transferee that they had left the UK on a permanent basis with no intention of returning to the UK to work or to retire,
-A copy of an employment letter or contract from the transferee’s employer that the transferee is already in employment or self-employment overseas, 
-A P45 or final accounts confirming that all UK employment ties have been severed,
-Written confirmation from the overseas scheme administrator of the country of establishment of the receiving overseas pension scheme,
-Evidence that the receiving overseas scheme and the transferee reside in the same country and, finally,
-That the receiving overseas scheme is approved and qualified by the tax/supervisory authority and capable of receiving transfers.
Why were new overseas pension transfer rules required?

The rules, as they stood pre A-Day (and before the Finance Act 2004) were pretty tight and ensured a transfer was carried out legitimately. However, the Inland Revenue were concerned as to what happened to the UK tax-relieved pension funds after the transfer had occurred.

As the local pension rules in overseas jurisdictions such as Australia, New Zealand, the Channel Islands and many tax haven countries were completely different from the UK, many people were taking the opportunity (where possible in some jurisdictions) to unlock their pension funds or take early retirement benefits and then return to the UK.

The Finance Act 2004 and Statutory Instrument 2006/206 (laid before the House of Commons on 2nd February 2006), saw the introduction of the QROPS (Qualifying Recognized Overseas Pension Scheme) rules.

These rules removed all the previous IR22 and IR76 requirements (stated above) and shifted the onus onto the overseas scheme to meet the conditions set out in Statutory Instrument 2006/206 and the Registered Pension Scheme Manuals (RPSMs) on the HMRC website.

If the overseas pension scheme met the conditions, they could apply to HMRC and receive UK tax approval as a QROPS. However, the overseas pension schemes responsibility did not end with the gaining HMRC approval and receiving the UK pension transfer. For 5 complete UK tax years of the pension member’s overseas residency, the QROPS would have to report to HMRC any payments such as income, lump sum or death benefits paid to the member that transferred their UK benefits in.

Should these reportable payments exceed the UK permitted maximums, than an unauthorized payment charge would be levied against the member and the QROPS would come under scrutiny from HMRC.

This changed the pension rules completely for pension schemes in popular migrant destination countries, such as Australia and New Zealand for example, where schemes there had (before A-Day) there own method of paying benefits – which was totally unlike the UK rules. However, plenty of overseas schemes (including those in Australia and New Zealand) have embraced the new UK conditions and are approved to accept UK pension transfer money.

What are some of the effects of the QROPS rules?
One of the key advantages of the QROPS legislation is the flexibility of where funds can transfer to. Before A-Day, an individual could only affect a UK pension transfer overseas to a scheme in the country that they migrated to. This is now not the case. More options are available.

UK schemes, that were in drawdown (now referred to as unsecured pension) could also transfer where previously it was not permitted.

However, those people transferring looking to take advantage of local overseas pension rules, where payments lump sum payments are more generous (for example) would have to transfer there benefits to an HMRC approved QROPS and wait for 5 complete UK tax years of overseas residency before they can have their benefits paid in a format other than within the UK rules.