QROPS pensions are not dead and buried following recent tax and rule changes, they are just evolving and a lot of the hype about big tax bills that come with them are just hype if you read the small print.
Despite reports that the QROPS market is stuttering, around a thousand of the specialist offshore pensions are open for business in 29 financial centres around the world.
Official figures confirm 108,000 retirement savers have transferred pension cash worth £8.8 billion offshore to one of the schemes since QROPS started in April 2006.
And although the rumours about tax charges are true, few expats will have to foot the bill for moving their retirement savings to one of these tax-effective offshore funds if they take professional advice.
So, here’s a look at QROPS in 2017 and how the rules impact on expats.
QROPS pensions explained
HM Revenue & Customs in the UK supervises QROPS compliance to make sure retirement savers and scheme providers do not take advantage of the rules to gain an unfair tax advantage.
QROPS is the widely-used term for a Qualifying Recognised Overseas Pension Scheme, although HMRC now favours the title ROPS over the older QROPS acronym. All QROPS are ROPS and the abbreviation just drops the word ‘qualifying’.
Although based offshore, a QROPS offers functionality similar to a UK-based self-invested pension plan or SIPP.
Can all expats switch their UK pensions into a QROPS?
The rule of thumb is QROPS are open to British expats who have made a home overseas or international workers who lived in the UK for a while and saved into a pension while they were there.
Not all pensions can transfer into a QROPS.
Public sector and civil service pensions along with the state pension are not transferable as they do not have an underlying fund with a value.
Retirement savers can switch most other pensions, such as workplace and personal schemes.
How do I know if I am an expat?
Deciding your residence status is a matter of fact, rather than choice. QROPS rules do not refer to expats but non-UK residents and you will need to establish you are a resident in another country or show you will shortly become so to qualify for a QROPS pension.
Why can’t I open a QROPS without financial advice?
This is one of the recent changes that impacts expats. The British financial services watchdog is proposing anyone transferring a direct benefit pension worth £30,000 or more to a QROPS from the UK should have advice at both ends of the transaction.
A direct benefit pension is typically a workplace scheme that comes with retirement income guarantees and other benefits, such as spouse death benefits
As the cost and benefits of switching a fund worth less than this is not worthwhile for most expats, nearly all are caught in this net.
The Financial Conduct Authority (FCA) wants an advice safety net for expats, with one UK-based adviser recommending the transfer is in the best interests of someone leaving a British pension scheme and another in the destination country checking the receiving QROPS is also suitable for them.
Although this rule is not yet in force, most QROPS advisers will want this double-ended arrangement to avoid breaching UK regulations and to protect their businesses from clients claiming they lost money as a result of receiving unsuitable advice.
Transfer charge is inconvenient rather than a tax trap
Pension freedoms started in April 2015 and let any retirement saver over the age of 55 take money from their pensions as they wish.
But they don’t.
Not all workplace pensions allow pension freedoms and many restrict taking cash to savers aged 60 or sometimes 65 years old or over.
To access their cash, many savers want to switch their guaranteed retirement income to a QROPS, SIPP or other personal schemes that already operate under pension freedoms.
Although not all QROPS come with pension freedoms, some in Malta already do and others in places like Gibraltar and the Isle of Man are readying to follow suit.
This anomaly has triggered an influx of inquiries from savers who cannot access the freedoms who want to switch their money overseas to let them retire early or top-up their income for a phased retirement.
QROPS can be the ideal home for expat money but the transfer tax introduced in March 2017 complicates the move but does not stop switching money overseas tax-free.
On face value, many expats believe every QROPS switch attracts the transfer charge – but they do not.
How QROPS transfer charge works
The Overseas Transfer Charge may look like a disaster for expats wanting to move their retirement cash to a QROPS, but the reality is few expats will have to foot the bill.
The transfer charge is levied at 25% of the value of the fund switched from the UK to a QROPS or between QROPS.
But only under certain circumstances.
Expats do not pay the charge if:
- The expat lives in the European Economic Area (EEA) and the transfer is to a QROPS within the EEA.
That covers the UK, the European Union states, Iceland, Norway and Liechtenstein.
So, a British expat living in France with a QROPS in Malta does not pay the transfer charge.
- The expat lives in the same country as their QROPS is set up.
So, any expat moving to a financial centre on HMRC’s QROPS list switching money to a QROPS set-up in that country does not pay the transfer charge.
Outside Europe, for example, an expat in India with an Indian QROPS does not pay the tax.
One point to bear in mind is Hong Kong QROPS are eligible schemes for anyone living in China.
These are not the only tax-exempt transfers. The others include pension schemes run by NGOs, like the European Union or United Nations, overseas government pensions or workplace pensions operated by the expat’s employer.
A tax trap is an expat moving after a tax-exempt QROPS transfer may inadvertently trigger a bill if they or their pension money move to a country where the exemption does not apply within five years of the first transfer.
Telling HMRC about your QROPS transfer
Expats switching UK pensions to a QROPS or between QROPS have an obligation to tell HMRC about the transaction so the overseas transfer charge is deducted at source.
Breaching the £1 million lifetime allowance
Many retirement savers may have funds that will exceed the £1 million lifetime savings allowance before they retire, but a QROPS does offer a legal work around.
Although HMRC will test the fund value on transfer out of the UK to make sure the value is less than the limit, once in a QROPS, the lifetime allowance no longer applies even if the fund is moved on to another QROPS later on.
Taking up to 30% of a QROPS fund tax free
Yes, this is true. Some financial centres allow larger lump-sum withdrawals without tax than UK pensions.
These include the Isle of Man and Malta.
Tax on QROPS payments
QROPS pay pension benefits with deducting tax, but income tax may be due in the place where an expat lives.
Easing foreign currency transfers
Expats paid from UK pensions are paid in Sterling, but QROPS can pay out in most major world currencies to stop the cost of exchanging money eat into their bank balances.
What happens to a QROPS if I return to the UK?
If an expat with a QROPs returns to live in the UK, their pension payments are paid gross but taxed as income in the same way as a UK pension.
Finding out more about QROPS
The best place to find out current information about QROPS transfers is from a properly accredited international independent financial adviser.
For more information about QROPS and the benefits it provides, download the iExpats QROPS Guide or complete the Get Advice form.