The purpose of this QROPS guide for expats is to use 20+ years of experience in dealing with international pensions to help you understand how QROPS work and outline the circumstances in which they should and should not be used.
Tens of thousands of British expats have transferred their UK pensions to QROPS structures since they were launched in April 2006.
The structure has proved to be incredibly popular as they help Britons who have permanently moved abroad to simplify their affairs by taking their pension savings with them.
However, while the theory is attractive, the rules and regulations around QROPS are very complex and they are certainly not a one-size-fits-all solution. In fact, there have been many cases where transferring to a QROPS has proved to be the entirely wrong course of action.
While the positives of QROPS are always highlighted by financial salesmen, some of these are spurious at best and there are usually a number of important negative facts that are not mentioned.
Typically the negatives include higher fees, the lack of regulation of the funds used, a genuine reason for a transfer and the tax implications of accessing the funds in retirement.
I will address both the positives and negatives in this guide.
What is a QROPS pension transfer?
A Qualifying Recognised Overseas Pension Scheme (QROPS) is an overseas pension scheme that meets certain requirements set by Her Majesty’s Revenue and Customs (HMRC).
You can read more about these requirements here.
The QROPS programme was part of UK legislation launched on 6 April 2006 as a direct result of EU human rights requirements regarding the freedom of capital movement.
The main function of QROPS is that it allows British expats to move their pensions abroad.
If the QROPS is in a country that taxes pensions at a minimal or even a zero rate, a pension transfer can potentially have tax benefits. However, if you or your adviser get the transfer wrong, you could be hit with a 55% tax penalty from HMRC.
QROPS pitfalls for expats
Accessing your pension within 5 years
To obtain full QROPS benefits you must leave the UK for more than 5 full tax years. If you wish to access your QROPS in less than 5 years then there can be significant tax issues.
In particular, if you access a large amount of the fund while outside of the UK and then return to live in the UK, all within a 5 year period.
Doing so may mean that you fall foul of an anti avoidance wording in ITEPA 2003 s.574A which can hit a pension saver even if there was no intent to avoid tax.
According to the wording, when someone withdraws flexi-access pension payments during a non-UK residency, should the non UK residency not exceed 5 years, then any “relevant withdrawals” are to be treated under foreign pension tax rule as if they arose in the year of return and s.576A (7) specifically overrides any double tax treaty.
A Relevant Withdrawal is an amount (other than an annuity) which the member is paid from the member’s drawdown pension fund or flexi-access drawdown fund.
If the amount exceeds £100,000 as a withdrawal then the nature of that payment will determine if the QROPS holder is liable to UK Income Tax:
- If the payment had an element of Pension Commencement Lump Sum (PCLS) then the threshold is not likely to be exceeded and HMRC will have no interest in this.
- However, if the £100,000 was an income withdrawal then any amount above this will be taxable by HMRC.
If you are within 5 years of being UK resident or plan to return to the UK to retire, you should take tax advice if you want to access your QROPS. In addition, you should seek advice from an appropriately qualified and regulated specialist pension adviser.
Overseas Transfer Charge (OTC)
If you are considering transferring a UK pension fund to a QROPS, you must remember that you may be subject to the Overseas Transfer Charge (OTC) not only at the time of transfer but also, potentially, in the future.
What is the OTC?
The Overseas Transfer Charge came into effect from 9th March 2017 (with 24 hours notice!!!) and applies to most QROPS transfers (there are special circumstances where such transfers are exempt, see below).
It is charged at 25% of the transferred value.
The charge is automatically deducted by the QROPS manager from your fund and transferred to HMRC.
The tax is applicable to transfers into a QROPS, whether the source is a registered UK pension scheme, another QROPS or a scheme that once qualified as a QROPS.
It is not applicable to funds derived from UK pension transfers to QROPS before 9 March 2017.
It is also not applicable to transfers to another UK registered pension scheme, e.g. a SIPP (Self Invested Personal Pension).
When is the OTC not payable?
There are a few scenarios where the OTC is not currently payable. However, for the purpose of this post, the most relevant is when the funds are being transferred to a QROPS that is established in a country within the European Economic Area (EEA) and the member is also a resident in a country within the EEA.
For example, if the QROPS is established in Malta and the individual is resident in Spain, then the OTC would not apply at the time of transfer.
What happens if my circumstances change?
However, if your circumstances change within the first five full tax years (6th April to 5th April) after a QROPS transfer has taken place, then a transfer that was not subject to an OTC at the time of transfer could become fully chargeable.
For example, if within five years you move from Spain to another country that is not in the EEA, then the OTC will then be payable.
How could Brexit affect the Overseas Transfer Charge
Given that the QROPS programme was part of UK legislation launched on 6 April 2006 as a direct result of EU human rights requirements of the freedom of capital movement, it is not inconceivable that, at some time post-Brexit, that the OTC will be applied to EEA residents too.
Double Taxation Treaties
The UK has Double Taxation Treaties with countries all over the world to ensure that, in most cases, expatriates will have no further tax to pay, or indeed they can transfer their tax to their country of residence and pay any tax due there.
The various QROPS territories (Gibraltar, Malta, Isle of Man, etc.) also have their own Double Taxation Treaties with various countries. However, they are generally not as flexible or comprehensive as those that the UK has.
As a result, you could end up paying additional taxes that you were not anticipating.
Additionally, on your death, your beneficiaries may pay an additional income tax charge in the country that they live in.
This may actually put a QROPS at a disadvantage over a UK pension and so should be one of the factors taken into consideration before transferring (or revisited if your circumstances change post-transfer).
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Advantages and disadvantages of using a QROPS
QROPS advantages for expats
Under current UK legislation, you can only accumulate a tax-privileged pension fund of up to £1,073,100 (frozen at this level until 2026), unless you apply for certain types of protection which can boost this to higher levels in some circumstances.
One of these protections is the “non-residence enhancement factor“. This, often overlooked, allowance allows expats to increase the level of their lifetime allowance.
Pension savings above the lifetime allowance (LTA) may be taxed at 25% or 55%.
This means, if the value of your UK pension fund is close to the LTA (or your enhanced LTA) it may be worth considering a transfer into a QROPS to avoid being taxed on your pension savings above the LTA in the future.
Potentially greater Pension Commencement Lump Sum
With a UK ‘defined contribution’ pension, in most cases the maximum Pension Commencement Lump Sum (PCLS) is 25% of the pension value.
With some QROPS, the PCLS can be up to 30% of the pension value.
If you are living overseas, income from UK pension arrangements is taken according to the relevant Double Tax Treaty (DTT).
This can allow tax to be taken in the country of residency.
However, if there is no DTT in place between the UK and your country of residence, or if the DTT specifies that tax will be imposed in the UK, then a withholding tax of 20% will be applied in the UK (on pension income above any unused Personal Allowance).
However, there are a few countries where transferring pension rights to an overseas pension scheme (i.e. a QROPS) means that income tax on pension income can be legitimately avoided, even where there is no UK double tax treaty with the country.
Choice of payment currency
While UK pensions often only make payments in sterling, QROPS allow you to receive your funds in other currencies.
This is an advantage for British expatriates living abroad as it reduces exposure to exchange rate fluctuations and removes currency conversion costs.
Consolidation of multiple pensions
A QROPS (or a SIPP) enables you to get all your pensions transferred to the same place, where you can access them online whenever you want, giving you greater visibility and making managing risk easier.
UK defined contribution schemes have no UK tax deducted on death if the holder is under the age of 75. In addition, any UK resident beneficiaries will have no tax to pay on anything that they receive.
However, if the holder is over 74 on death, then, while the fund can be passed without any tax penalties, the beneficiaries will have to pay tax on anything they receive at their marginal tax rate.
With a QROPS, not only will the fund not be taxed on death, additionally, any UK resident beneficiaries will not be liable for UK taxes on any benefits that they receive, irrespective of the age that the holder was on death
Finally, it is worth noting that non-UK resident beneficiaries may be subject to local succession/inheritance taxes in their country of residence (as always, local tax advice should be sought).
Overseas Transfer Charge
See “Pitfalls” above
Trustee costs for a QROPS are typically higher than they are for a UK Defined Contribution pension (e.g. a SIPP).
Expats often have their QROPS combined with portfolio bonds
In the vast majority of cases that I have seen where an expatriate uses a QROPS, there has also been a portfolio bond in place to “hold” the investments.
To be clear, while portfolio (insurance) bonds have their place in holistic financial/tax planning, when held within a QROPS they are not necessarily the best option.
This is because the tax benefits that they offer are already provided by the pension wrapper.
In many cases, the only reason that such structures are held within a QROPS is to enable the financial adviser to earn a commission from the sale of the bond.
5 points that everyone should understand about commission
1. When you take financial advice, you can pay a separate, transparent fee, or elect to have the product provider pay a commission to your adviser.
2. Clients are often told that where there is a commission it is FREE advice which is understandably enticing. However, it is also wrong.
The commission is recouped through higher product charges for many years (in some cases these charges apply for the lifetime of the product).
3. Often the adviser is encouraged to recommend the product with the largest commission rather than what is best for you.
4. The provider of the bond will want to make sure that they earn back the commission that they paid to the adviser. To facilitate this they will apply surrender penalties of up to 10% to your bond should funds be withdrawn in the early (first 5-10) years.
While this is not necessarily such a big deal if you are many years from retirement, it is a big issue if you are planning to access your Pension Commencement Lump Sum or to start drawing your pension within a couple of years.
5. The additional higher charges linked to portfolio bonds reduce your real returns. Often severely.
These bonds are sold by offshore life insurance companies such as Utmost Worldwide (ex-Generali), Old Mutual/Quilter International, Friends Provident International, SEB and RL360.
While they all offer low/zero commission versions of their products, these are rarely used by advisers.
QROPS often act as a conduit for investing in dodgy funds
Airport car parking spaces, store pods, overseas property developments, teak plantations and truffle trees, care homes, second hand life insurance policies.
These are just some of the “exotic” investments that I have seen held within QROPS.
While they sound like exciting, “thinking outside the box” opportunities and are marketed as having great return potential with limited downside risk, they have all ended up showing disastrous results for clients.
While similar funds have been touted in Britain too, regulations for QROPS investments are much looser than for UK pensions. As a result, it is much easier for an adviser to recommend that QROPS funds are invested in such investments.
Often, the only reason that this happens is that advisers will be receive an additional commission for recommending this kind of fund.
QROPS and structured products
The same applies to structured products. These are usually highly complex products that are only suitable for professional investors.
Again, the only reason that they are pitched to regular retail investors is that they typically pay commission to the adviser.
Usually, it is possible for investors to secure the same benefits of a structured product through a well-diversified portfolio of low-cost index funds, without the complexity, lack of liquidity and hidden costs.
Double Taxation Treaties
As mentioned above, residents in certain countries could end up paying taxes that they were not anticipating as a result of the Double Taxation Treaty between their country of tax residence and the jurisdiction of the QROPS.
You should always seek professional tax advice in your country of residence and/or the country that you intend to retire in before either transferring funds to or drawing down funds from a QROPS.
Who could consider using a QROPS
- Anyone approaching the lifetime allowance (LTA). Currently £1,073,100. However, as mentioned above, expats should also look at increasing their LTA.
- Expats that live in, or are are planning to retire in, a country with no double tax agreement with UK, and are likely to be taxed twice, or pay unnecessary tax in the UK
- Any expats who are approaching 75 and want their beneficiaries to avoid paying tax on the funds that they receive.
- People overseas who are likely to exceed £1m in pension funds by retirement
Who should not transfer to a QROPS
- Anyone who has scheme-specific lump sum protection. This is the name given to the form of protection that allows such individuals to be paid a pension commencement lump sum that is more than 25% of the value of their total benefits coming into payment from the registered pension scheme.
- If your pension scheme provides a guaranteed annuity rate (GAR). Retaining this benefit could provide you with a higher level of income by allowing you to purchase an annuity at a fixed rate that is considerably higher than current rates.
- Anyone returning to UK to live, especially if they are approaching or are already in retirement, unless their fund is likely to exceed the Lifetime Allowance.
- Anyone with a fund less than £150,000; the costs outweigh the benefits.
- Anyone not currently resident within the EEA or not resident in the same jurisdiction as the QROPS, and anyone planning to move from that jurisdiction or the EEA within 5 years of a transfer. See Overseas Transfer Charge.
How will Brexit affect UK pensions?
I have seen a lot of scaremongering by firms promoting the transfer of pensions for expats, regarding Brexit.
In a nutshell, they suggest you will lose access to your UK pension, pay more in tax and have less control post the Brexit apocalypse. Therefore if you are resident in the EU, you need to transfer your UK pension to a QROPS pronto.
However, the actual position on UK pensions will not actually change post Brexit as these rules have never been determined by the EU.
In terms of tax, the position has always been dealt with individually by national governments with respect to any Double Tax Treaty.
QROPS and Brexit
QROPS were introduced in 2006 as a result of the UK adopting EU legislation.
In fact, the UK actually went further than the EU legislation required and made it possible to transfer UK pensions to QROPS anywhere in the world, not just within the EU.
However, due to abuses by some advisers, HMRC took serious action to limit overseas pension transfers in April 2017 through the Overseas Tax Charge (OTC).
The key point here is that due to EU legislation it was not possible to apply the OTC within the EU. This is, as mentioned previously in this post, likely to be reviewed post Brexit.
Therefore, if you are one of the people that would benefit from considering a QROPS (see above) and are concerned about the uncertainty of future UK pension reforms, then you could consider future-proofing yourself by transferring your funds out of the UK into a QROPS.
QROPS Q&A – Answers to some of the common QROPS questions that expats have
What should I do with my QROPS if I am returning to the UK?
You may not need to do anything (especially if your pension fund exceeds or is likely to exceed the Lifetime Allowance).
However, before doing anything, you should consult with both a UK tax adviser and a UK regulated financial adviser.
Can I transfer a QROPS back to the UK?
Yes. You can transfer assets held in a QROPS to a UK Self Invested Personal Pension (SIPP).
This will bring it back under the auspices of HMRC.
If the QROPS and the SIPP are with the same company, then you maybe able to do so without cost.
However, there may be negative tax implications for doing so (e.g. your pension fund may now be in excess of the Lifetime Allowance). Therefore, you should speak to both a UK tax adviser and a UK regulated financial adviser first.
Can I use my QROPS to invest in residential property?
Can I switch my QROPS to another adviser?
Yes you can.
If you want to switch your QROPS provider (e.g. Momentum, Sovereign, Baker Tilly, IVCM) to another provider, then you will face a fee to do so (typically £2-3,000).
However, if you feel that your financial adviser is not pro-actively managing your pension or is not living up to expectations, then you can always replace them with another adviser without any cost or penalty.
The same applies if your adviser has moved on and you have, as a consequence, lost contact with him or her.
You should obviously ensure that any new adviser is suitably experienced and qualified.
What investments should not be held within my QROPS
Teak plantations, store pods, airport parking places, second hand life insurance policies; anything that sounds too exotic.
Anything that sounds too good to be true.
Anything that you don’t fully understand.
Anything that is registered on some wee island in the Caribbean.
Can I switch the investment platform within my QROPS?
You should especially consider your options and seek a second opinion if your QROPS uses an insurance/portfolio bond from Old Mutual International/Quilter), Utmost Worldwide (ex-Generali), Friends Provident International, Hansard, RL360 or SEB.
QROPS for expats? Conclusion
QROPS do have their advantages for some expats.
However the rules and regulations regarding them are complex and they certainly are not a one size fits all solution.
I have seen many cases a transfer to a QROPS has been the wrong course of action.
I have also seen many instances where the way that a QROPS has been structured leaves a lot to be desired.
With that in mind, if you have a QROPS then it is always worth getting a second opinion from an experienced and suitably-qualified adviser who understands your unique needs and circumstances.
Contact me directly with any QROPS questions that you have.