QROPS is short for Qualifying Recognised Overseas Pension Schemes. These are Pension Schemes recognised by Her Majesty’s Revenue and Customs (HMRC) as being to some degree comparable to UK Pensions, and therefore eligible for transfers from UK Pensions. They are also known as Offshore Pensions.
QROPS exist primarily thanks to the European Union. Among the several economic and personal liberties agreed upon by EU members is the right to move one’s savings between countries. And given that a Pension Scheme is a form of savings, it too should be mobile. However, unlike simpler investments, pensions are subject to special tax treatment and extensive regulations, such as on contribution periods. Thus, in 2006, the UK regulated which Overseas Pension Schemes were deemed to have comparable rules to those in the UK, and authorised the transfer of UK Pensions to them. Ultimately, many non-EU countries were also included.
Because of their multiple tax and investment flexibility advantages, over the past decade it became very popular among expats, and there is a significant specialised QROPS industry in 40 countries, totalling several thousand different plans. The Channel Islands, Gibraltar, Malta and Australia are some of the major QROPS centres.
UK Pensions Guide: How to optimise your UK Pension schemes.
What are the benefits of transferring your UK Pension overseas?
Reduce your taxable income
UK pensions are subject to income tax on the portion that exceeds a threshold known as the ‘lifetime allowance’, or LTA, which currently stands at £1 million, at rates of 55% on lump-sums or 25% on yearly incomes. Transferring into a QROPS counts as a ‘benefit crystallisations event’, which means that if you are over the lifetime allowance when you transfer, you must pay tax. However, once the funds are in the QROPS themselves, they are no longer subject to the LTA. In other words, they are completely exempt from UK income tax, providing a clear advantage for those in a position to grow their pensions past the £1 million mark. Furthermore, the LTA has been consistently reduced over the past years (it was £1.8 million only four years ago) and could well be reduced further, so it may be advantageous to ‘escape’ it as soon as possible.
Despite sometimes being called Offshore Pensions, however, it is an HMRC requirement that QROPS must also be available to local residents of the country in which they are based. This means that they are subject to local income taxes. Those, naturally, vary from the very attractive in low-tax jurisdictions to comparable to UK levels in some other major economies, and will also depend on tax treaties between the country in which your QROPS is based and the country in which you are actually resident, which need not be the same. Generally speaking, it is possible to pay much lower total rates of income tax on QROPS than on local UK pensions.
After only five years of non-UK tax residence, QROPS funds can be passed-on upon death to non-UK beneficiaries free of UK inheritance tax (IHT). This compares favourably to the 17 out of 20 years prior to death that one must have lived outside the UK in order to protect entire estates from IHT.
Payment flexibility
Some QROPS offer 30% tax-free lump-sum withdrawals, as compared to the UK standard of 25%. Regarding the remainder, which in the UK can be withdrawn but is subject to tax, EU QROPS offer similar flexibility, while other jurisdictions do face the restriction that the remainder must be used to provide a lifetime income for the pensioner. While QROPS are required to calculate pension incomes based on Government Actuary Department (GAD) tables, actuarial estimates allow for some degree of subjective judgement, and some QROPS thus pay somewhat higher incomes than UK pensions. QROPS can make payments in currencies other than Sterling, mitigating currency risk for those retiring abroad with expenses in other currencies.
Investment flexibility and mobility
Because they are designed for mobile, international, expat customers, and because the market for them is competitive, QROPS offer investment and portability flexibility that is comparable to UK SIPPs (Self-Invested Personal Pensions) and superior to average UK pensions (which in some cases rely on locking customers in to a high-fee and mediocre-return plan). They are thus attractive vehicles for consolidation of multiple pension pots, for instance.
Protection in case of bankruptcy or divorce
While transferring assets into a QROPS in order to hide them from creditors or divorced spouses can be deemed to be fraud, and while even if courts do not have jurisdiction they can force offsetting payments from funds where they do have jurisdiction, if a QROPS is set up as a genuine retirement option, it can also, in these unfortunate situations, have an added side-benefit of providing some degree of protection to your assets.
Am I eligible to transfer my pension overseas?
QROPS are most appropriate for expats who have left the UK ‘permanently’ and intend to retire abroad. QROPS are subject to a so-called ‘five-year-rule’ – QROPS benefits are fully available once you have not been UK resident for five tax years. Until then, QROPS are required to match UK pension conditions. If you do subsequently return to the UK, the QROPS income will once again be subject to UK income tax as a foreign pension, which has the benefit of being 10% exempt.
UK residents or those living abroad temporarily are not eligible. It is essential to be certain of one’s tax status before opting for a QROPS, as unauthorised transfers by UK tax residents into these schemes result in severe penalties, such as tax of 40%. UK state pensions are not transferrable into QROPS. Pensions in which an annuity has been purchased are not transferrable.
As a financial product offered by private companies, rather than a subsidised corporate or government scheme, QROPS are Defined Contribution plans – pensioners bear their own investment risk. Thus, even when possible, it is usually not attractive to transfer defined-benefit plans (in which the pension schemes guarantee a certain income to the pensioner) to QROPS. There are a few specific exceptions.
For instance, because final-salary schemes typically pay spouses 50% of the original pension upon death, while QROPS can use the entire pension fund to pay spouses, for those with a short life expectancy it could make sense to make the switch. Furthermore, precisely because defined benefit plans are so generous, some schemes are underfunded, which means that they won’t have enough capital to pay out all the pensions they owe.
While UK pensions are subject to protection in that situation, such protection is capped. So for those with very large pensions from severely underfunded schemes, it could make sense to protect their capital. By and large, however, defined-benefit schemes are too attractive to give up. Due to exit fees, it may also not be attractive to transfer some defined-contribution pensions to QROPS.
UK Pensions Guide: How to optimise your UK Pension schemes.
How does HRMC select QROPS?
HMRC imposes a number of requirements on QROPS for them to qualify. Some of the most important are: QROPS cannot offer pension tax relief only to overseas pensioners. They must be available as pension plans for local residents. Problematically, this means that, by definition, countries that do not allow foreign transfers into their local pension schemes are not able to offer QROPS. The most notable case is that of the USA. Because American retirement (401k) plans cannot receive transfers from abroad, there is no such thing as an American QROPS.
QROPS must respect a minimum retirement age of 55. This has been another source of contention, as in many countries the minimum retirement age is lower, resulting in funds being de-listed. QROPS must register with and report to HMRC. In particular, QROPS must report on payments made to members. QROPS must be based in the EU (and related countries such as Norway), or in countries with DTAs with the UK.
Regarding non-EU funds, QROPS must have rules ensuring that at least 70% of funds will be used to provide an income for life. Because ‘income for life’ is not strictly defined in the HMRC rules, this gives pension schemes some leeway in providing QROPS pensioners with larger incomes.
What are the cost involved to transfer my pension?
Exit fees from existing pension plans, as mentioned above. One must assess these on a case-by-case basis. One-time QROPS set-up fees of £300 to £3,000, often with some link to the size of the pension being transferred. Yearly QROPS maintenance fees, which are in the same range of the one-time fees. Investment management and advisory fees, which are usually a percentage of assets.
Given that there is a fixed fee component, and that one of the benefits is protection from taxes that are subject to minimum thresholds, QROPS are most attractive for pots in the hundreds of thousands of pounds, but pension pots of as little as £50,000 can be reasonably transferred into QROPS. For amounts lower than that, QROPS fees could well eat into returns.
Regarding management fees, it is worth noting that because of the broader competition and the fact that in some cases QROPS can access international or institutional share classes of funds, management fees can sometimes be lower than those of standard retail pension funds.
What are the risks?
First is that the Pension Scheme may lose its Qualified status. The HMRC publishes a list of the eligible schemes. Regardless of eligibility at any given point in time, though, schemes that have been aggressive in their interpretation of HMRC rules have been delisted before, in some cases de-qualifying most QROPS in entire jurisdictions. For example, Australian QROPS were once known to offer loopholes allowing pensioners access to their funds before the age of 55, one of the core requirements of a QROPS. HMRC eventually de-listed those funds, at substantial inconvenience to pensioners.
Second, because they are based outside the UK, and while they are subject to HMRC regulations insofar as being ‘Qualified’ at any given moment, QROPS are otherwise subject to the regulation of their local jurisdictions, which vary in terms of the stringency of their requirements and the degree of protection that they provide to pensioners. As with any other kind of investment, inappropriately sold products, providers that do not have adequate financial strength or controls and, more rarely, outright frauds, do exist. Having said that, QROPS are not, in principle, riskier than any other kind of international investment.
List of QROPS jurisdictions
Where you decide to retire, local tax rates and double-taxation agreements. Your QROPS needn’t be based where you live. But where you retire determines whether you should be looking for the lowest possible tax rates or the most favourable double-taxation agreements with your new chosen home. Overall institutional stability and safeguards. Generally speaking, all else equal, richer and democratic countries, with greater degrees of regulation and legal, language and cultural proximity to the UK are naturally more attractive.
Two notable jurisdictions in terms of attractiveness include:
QROPS Gibraltar, which has an income tax rate for pensioners of only 2.5%, one of the most attractive among QROPS jurisdictions, to the point where the HMRC has pushed back somewhat (the tax rate was initially zero). It is reasonable to say that for many expats, Gibraltar is the most attractive destination from a tax standpoint.
QROPS Malta which has grown as a ‘conservative’ jurisdiction: pension incomes aren’t taxed, unless they are from investments in Maltese property, allowing funds to grow at a fast rate. Withdrawals, however, are taxed at rates of up to 35%, an obvious disadvantage vs. Gibraltar. Despite this, because of full EU membership and perceived institutional strength, the industry has flourished here.
Other jurisdictions include the Isle of Man (7.5% estate tax, 20% income tax, but with DTAs with Australia, New Zealand, Qatar, Bahrain and several European countries), Guernsey (which with 0% taxes and aggressive flexibility policies was hit hard by HMRC) and Australia, which suffered setbacks from de-listings because its funds allowed withdrawals before the minimum age.
Regarding Asia, QROPS in jurisdictions such as Hong Kong do exist. But sometimes for expats based in these countries it can be preferable to have their schemes based in a jurisdiction such as Gibraltar, which has low taxes and DTAs with Hong Kong.
How to transfer your UK Pension to a QROPS
Transferring UK pensions to a QROPS is a straightforward, if somewhat bureaucratic, process. You must have a clear understanding of where you would like to retire, and what your financial needs and desires are. Ideally this will already have been established within the context of a comprehensive personal financial plan, though that is not absolutely necessary. You (and your financial advisor) must ascertain the details of all of your UK pension funds: defined-benefit or defined-contribution, amounts, management fees and investment performance and exit fees.
Your advisor suggests the ideal structure for the country in which you would like to retire, and you compare expected returns and possibilities of your current pension to that of the QROPS, net of fees and taxes and weigh pros and cons. Your advisor sets up the QROPS and requests transfers from your existing pensions, using HMRC templates. UK pensions can unfortunately be slow in carrying out the transfers.
A reasonable time-frame to expect for the entire process is around 90 days.
UK Pensions Guide: How to optimise your UK Pension schemes.
Why do I need a financial advisor?
You will have noticed that we mention financial advisors in the previous segment. Relying on specialist advice when transferring to QROPS is important for a number of reasons, some of which we have also touched on above. Ideally you have a clear idea of your financial needs and objectives and the transfer to a QROPS is informed by a comprehensive financial plan. If you have an estimate of when you plan to retire, how much you can expect your pension pot to be worth at retirement, what other assets you expect to have in your net worth, how much you will spend in retirement and whether you would like to leave an inheritance, it is much easier to determine all the ways in which a QROPS could support your objectives.
The array of QROPS options and providers, and jurisdictions with different tax treatments, is mind-boggling. The expense of hiring an advisor to make the optimum choice can pay for itself in terms of superior returns. Mistakes regarding your tax residence status or unauthorised payments to plans can be costly, and it can be useful to have someone experienced to reassure you. HMRC is clear in its documentation that it is the responsibility of the pension plan member to properly determine their own tax status and whether the chosen overseas plan is appropriate, and if necessary to engage an advisor.
Given that QROPS enjoy significant tax advantages and result in funds leaving UK pension funds, neither HMRC nor UK pension plans themselves are particularly helpful or pro-active when it comes to helping individuals make this move. As compared to domestic pension and financial issues, there is a dearth of publicly available independent and trustworthy advice. The broad investment flexibility that a QROPS provides also means you need to choose your investments well. It is possible to do so yourself, but, again, it can be helpful to have the assistance of a specialist.
What are the differences with QNUPS?
QNUPS are Qualifying Non-UK Pension Schemes. They have some similarities and were created at the same time, but were only fully regulated much later. QNUPS must have some rules that are similar to UK pensions – such as the minimum retirement age and being open to local residents rather than only to offshore investors. Unlike QROPS, however, QNUPS needn’t register with, or report to, HMRC and enjoy additional flexibility: they can make loans to members or can invest in exotic assets such as antiques.
From a tax standpoint, QNUPS are exempt from inheritance tax like QROPS, but not from income tax. It is also not possible to transfer UK pensions to them. So QNUPS are primarily a vehicle for those who already have, or will build up, their retirement savings outside the UK or who are primarily interested in estate planning rather than income tax planning.
If you are an expat or planning on retiring outside the UK, a QROPS can be a useful vehicle for your pension: in addition to a number of other benefits, it can offer significant tax protection, boosting your net returns and thereby making your hard-earned savings go further. While setting up a QROPS does not involve undue risk or complications, the array of tax and investment considerations and possibilities is broad, and having the support of a specialist can save time, money and avoid mistakes.
For more information on QROPS: Download our UK Pensions Guide.