Qualifying Recognised Overseas Pensions
Is QROPS the right pension transfer option for you?
Qualifying Recognised Overseas Pension Schemes are HMRC recognised pensions capable of receiving transfers of UK pension assets. QROPS can be useful for people living overseas that are no longer contributing to UK pensions and want enhanced pension freedom.
Anyone considering a QROPS should note that anyone without a five full tax years overseas completed, or expats returning to the UK with a QROPS are classed as resident with a UK registered pension scheme, such as a Self-Invested Personal Pension (SIPP). However, there are many benefits to using QROPS in the correct circumstances.
Income Tax Benefits
It is possible for QROPS to limit taxation on income if the scheme member has lived outside of the UK for the 5 previous tax years, and subject to DTA's (double-taxation agreements) in their country of residence. This does not avoid taxation however, and income tax may apply locally and/or where the QROPS is domiciled. It is crucial to consider tax obligations where you live and where income will likely be taken as DTA's vary greatly.
Taxation on Death
QROPS can provide protection from UK inheritance tax (IHT) for non-UK residents on death. Funds are no longer part of the member's estate in a QROPS and can be received tax-free if beneficiaries of the remaining assets are not British tax resident. However, inheritance tax rules may apply locally so it is important to seek advice where resident.
Final salary schemes seldom offer flexibility on death. A surviving wife, husband or qualifying spouse receives 50% of the benefit (sometimes rising to 66%) on the members death. Benefits then cease on the death of the surviving spouse (unless children remain under the age of 18 or age 21 and in full time education).
Transferring a DB pension can help avoid pension funds being lost on death of the surviving spouse. The beneficiaries can be selected by the member and control over how remaining funds are distributed is permitted. The proceeds will be taxed depending on the scheme and residency.
Flexi-access provides an incentive to transfer defined benefit pensions. Usually, DB pensions offer an income from age 60 or 65 that is correlated to the member's salary where both employee and employer contributed to the scheme. Income increases in line with inflation and is capped, and subject to the pension's terms and conditions it may offer a lump sum at retirement. If so, income thereafter will reduce.
Using a QROPS allows access to a lump sum of 30% from age 55 and the remainder can be taken either as lump-sums or income. Taking large lump-sums in any one tax may incur higher taxation, so seek tax advice locally.
Defined benefit schemes are managed without the member's input. Transferring to flexible schemes offers more control and influence in investment decisions. As always, care should be taken to ensure assets are suitable as investment guidelines may differ from one provider to another.
Good to Know
In March 2017 a 25% tax on QROPS transfers outside specific areas was introduced by the Chancellor of the Exchequer to promote fairness for members that have had tax relief, but wish to take their savings elsewhere. Taxing of pensions had not changed much since 2006 and applications subsequently dropped.
Transfers are now taxed 25% at the point of transfer unless the pension scheme and the individual are in the same country, both are within the European Economic Area (Liechtenstein, Norway, Iceland or EEA) or the QROPS is an occupational scheme from the member's employer.
Following a transfer to a QROPS, payments from the funds within five tax years will incur taxation (if for example, the individual becomes resident in a country non-qualifying for exemptions), extending the reach of HMRC. The charge is reversed if within five years criteria for a tax-free transfer once again apply (eg. member returns to Norway, Iceland, Liechtenstein or the EEA and has a Maltese QROPS).
The cost difference between QROPS and International SIPPS may also influence your decision as QROPS are more expensive. Larger pensions can dilute the higher cost, so schemes designed for smaller values are also available but may be limited to a range of portfolios selected by the trustee.
To speak to an expat financial advisor that will help guide you through a safe and secure pension transfer, contact us today and you'll get the help you need.