QROPS – Qualifying Recognised Overseas Pension Scheme.
A QROPS, or Qualifying Recognised Overseas Pension Scheme, is an overseas pension scheme that HM Revenue & Customs (HMRC) recognises as eligible to receive transfers from registered UK pension schemes.
To gain qualifying status, the scheme must meet the requirements set by UK law, and have notified HM Revenue and Customs (HMRC) that they meet the conditions to be a Recognised Overseas Pension Scheme, (ROPS). To find out if a pension is a recognised by HMRC, you can check their ‘ROPS’, list.
QROPS were born as part of UK legislation on 6 April 2006. The legislation itself was as a direct result of EU human rights requirements, i.e. it had been challenged that an individual living in the EU who had a UK pension, was not able to move it to a scheme in the country in which they reside or any other EU country for that matter, which was contrary to the rights afforded by the EU founding principles of freedom – movement of people, capital, goods, and provision of services.
Who can have a QROPS?
So the QROPS regime came into being as a result of EU requirements, however the legislation does not limit QROPS to the EU. Subject to a country’s regulation and tax system meeting entry criteria, a pension scheme in any where in the world can apply to be added to the ROPS list, and providing the scheme then also meets HMRC requirements, can gain QROPS status.
This means that people in many countries all over the world are able to have a QROPS and transfer their UK pension to it.
The legislation behind these schemes has changed several times over the years that its been in existence. The increasingly stricter requirements laid on the jurisdiction holding the scheme, and the schemes themselves, have in the last 5 years resulted in a major reduction in the number of countries that have QROPS, and the number of schemes available.
The most recent change effective from March 2017 had a major affect on QROPS. Up until this change, if someone wanted to, they could transfer their pension to a QROPS in any country regardless of whether they actually lived in that country. UK law now allows HMRC to impose 25% penalty on transfers to QROPS, when the person transfers their UK pension to a QROPS in a different country to the country that they are living in. So whilst anyone can have a QROPS, it will depend on where you live as to whether there is a scheme available, and or if you would incur a penalty if you were to transfer your UK pension to it.
There are exceptions for transfers within the EU. Anyone resident in the EU, including currently the UK, is currently free to transfer their pension to a QROPS in any other EU country without penalty. This of course is very likely to not be the case post Brexit.
More on the transfer penalty
From 9th March 2017, transfers to QROPS attract a 25% tax charge but there are exemptions. You can still transfer tax free if one of the following applies, you are:
- resident in the country where the QROPS receiving your transfer is based
- resident in a country in the European Economic Area (EEA) and the QROPS transferring to is based in another EEA country
or the QROPS you are transferring to is:
- an occupational pension scheme and you are an employee of a sponsoring employer under the scheme
- an overseas public service scheme and you are employed by an employer that participates in that scheme
- a pension scheme of an international organisation and you are employed by that international organisation
If the scheme you are transferring out of does not receive the correct paperwork to confirm eligibility for exemption, they are required to charge the 25% on transfer regardless, and you will have to apply for a refund via your scheme at a later date. If you are exempt from the charge on transfer but then your circumstances change within 5 years, such as moving to another country or moving your QROPS to another country, then you may have to pay the 25% tax charge at that point.
Will Brexit affect QROPS?
The short answer is that nobody can say right now. As with many other things relating to the UK leaving the EU this is just another unknown. That said, given QROPS came into being as a result of EU freedoms, and that free transfers of UK pensions to QROPS in the the EU are only assured because of this, when you also consider HMRC’s consistent moves over the years to shut down QROPS, the UK leaving the EU, leaves the way clear for UK legislation to be passed to get rid of QROPS altogether.
Whilst legislation could be passed after Brexit, closing down QROPS in the future, such legislation could not be retrospectively applied, therefore anyone who has already transferred to a QROPS, shouldn’t be concerned about Brexit affecting their offshore pension.
So the advantages that there may currently be in transferring a UK pension to a Qualifying Overseas Pension Scheme, could disappear after Brexit, however they will remain provided you make your transfer soon, i.e. before Brexit brings in any changes.
Why might someone transfer to a QROPS?
There are lots of reasons why people might transfer their UK pension to a QROPS, for example:
- Having their pensions in the country in which they retire
- For their pension to be in the currency of the country in which they live thus avoiding currency exchange rate risk
- To make it easier to manage tax and keep on top of regulation changes
- They work outside of the UK and their employer has an overseas scheme
- Simply to get free from UK pension legislation
Aside from the above, QROPS can offer the following:
- Up to 30% Tax Free Lump Sums compared with 25% in the UK
- Complete exemption from UK Inheritance Tax (IHT)
- Access to worldwide investment options
- Portability, and greater flexibility
- Consolidation of multiple funds
- Early retirement and flexible draw down exempt from UK tax
- Only 90% of the pension income taxable (on a return to the UK)
For people with final salary schemes, a transfer to a QROPS may also be a way to a) remove solvency risk, and b) take advantage of current low interest rates, which put transfer values at all time highs.
UK residents and QROPS
Aside from any of the above, which someone living overseas or planning to move or retire abroad may or may not find advantageous, there are also some reasons why a person living in the UK might consider transferring to a Qualifying Overseas Pension Scheme.
There is a limit on the total amount that you can have in a UK pension. If you exceed that limit, you, or your heirs will incur a tax penalty of up to 55% on the amount above the limit.
Transferring your pension to a QROPS freezes your pension at the transfer value amount, and allows you to potentially build a pension in excess of, and exempt from the LifeTime Allowance penalty charge.
Protection from Claimants
QROPS fall outside the reach of English courts. Whilst some countries may have agreements to co-operate on legal matters, depending on the jurisdiction, moving your pension to a QROPS, may make it more difficult, or even impossible for a claim to be successfully made on it. For example a creditor, or an (ex) spouse in the event of a divorce.
We can can answer any general questions about your UK pensions or QROPS. Get In Touch to speak to one of our Money Matters Consultants – (+34 951 77 55 44 / (+44) 033 000 10 777
Warning & Disclaimer
Before transferring to a Qualifying Recognised Overseas Pension Scheme, you should consider any guarantees or other benefits that you might lose by doing so. It is also recommended that you consult a suitably qualified professional who will be able to give you advice on the proposed transfer. Aside from the penalties already mentioned, if you transfer to an overseas pension and it is not a Recognised Overseas Pension Scheme, then you are likely to be deemed as having made an unauthorised payment from your pension which could result in an unauthorised withdrawal tax charge of 55%. Qualifying Recognised Overseas Pension Scheme’s are often not regulated, which could leave you without any recourse to compensation. It also means there is greater risk that your pension could end up invested in unsuitable or scam investments. In short the worst that could happen is that you lose all of your pension money and still find yourself with a tax charge to pay. Be aware of scams, don’t act on the basis of an unsolicited contact and always deal with a regulated financial adviser. We do not advise on transfers to QROPS, however can arrange a complimentary consultation with our in-house Independent Financial Advisers or UK based Pension Specialist partners who are qualified and authorised to give pension transfer and financial advice.