What is a QROPS Pension?
Updated: Feb 6, 2019
What is a QROPS pension?
QROPS stands for Qualified Recognised Overseas Pension Scheme. As the name suggests, this is a form of overseas pension scheme approved and recognised by HMRC. Through a QROPS, you are able to transfer assets from a UK registered pension scheme to an international jurisdiction of your choice. That country doesn’t necessarily have to be the one you are currently living in. With a QROPS, you gain full access to your pension without having to abide by the UK’s rules.
Why might you want to use a QROPS?
For anyone living overseas, a QROPS can prove enormously beneficial. It gives you greater freedom to decide where in the world you want your income to be paid or invested, unrestricted by UK rules. By transferring your assets from pounds into the local currency, you are no longer subject to ever-shifting exchange rates and so can achieve greater value for money. Furthermore, your pension will not be subject to any future changes in UK legislation.
Few people are aware of just how much they are paying for someone to manage their pension portfolio. Management costs are frequently hidden or are unclear. With a QROPS however, there is a far greater level of transparency and you can be more involved with the decisions being made around your pension.
How can you obtain HMRC approval?
In order for your QROPS to be formally recognised by HMRC and thus eligible for a transfer, it must meet certain criteria. Simply put, HMRC is looking to establish how similar the QROPS is to the standard UK pension scheme. For example, just like with a UK pension, you cannot access a QROPS before the age of 55.
If you’re looking for a QROPS that has already been approved by HMRC, you can check their online list.
Once you have your QROPS up and running, you will be required to continue reporting to HMRC for 10 years.
Where should I base my QROPS?
Given that your QROPS doesn’t have to be based in the country that you’ve chosen to retire to, where are the best places to choose from? You want somewhere that is stable and has internationally trusted regulators. Popular choices include trustees based in Malta, Gibraltar, Jersey and the Isle of Man. It is your trustee who technically owns the pension, but you have the ability to decide where the investments are made.
What are the tax benefits of a QROPS?
One of the major benefits of choosing to go down the QROPS route is the possibility of a reduction in tax after 5 years. In the UK, tax on pension savings beyond the individual’s personal thresholds can reach 45% for top earners. In contrast, several countries offer a zero rate of taxation on foreign pensions, including Qatar and the UAE.
If you are not based in one of these countries, you will either pay the income tax rate of your country of tax residence, or the income tax rate of the country where your QROPS is based. The decision will be made on the basis of whether or not there are any Double Taxation Agreements (DTA’s) between the two countries. These agreements identify which country takes priority when it comes to taxing rights, ensuring that you aren’t taxed twice.
Once you’ve completed your QROPS transfer, you can access a 30% tax free sum upon turning 55. This is sometimes referred to as a Pension Commencement Lump Sum (PCLS). With a QROPS, you are exempt from paying UK income tax upon your death although you may have to pay a local death tax in either your country of residence or the QROPS’s.
In some instances, the transfer of assets to a QROPS can result in a 25% tax charge. This charge came into effect on the 9th March 2017, but there are a number of significant exemptions. For example, if you have chosen to retire to the country where your QROPS is based, or if you and your QROPS are both based in countries inside the European Economic Area (EEA), the tax charge will not apply. If you haven’t actually retired and have in fact moved overseas to work, you can avoid the tax charge if your employer is a participant in the scheme. Should your circumstances change and you no longer qualify for exemption within 5 years of the transfer, you will be required to pay a 25% tax charge.
If you are interested in learning more about what a QROPS pension is, or are seeking independent financial advice on your investment choices, please do get in touch.
Please note that some of the information in this blog is only applicable to UK residents.