Qualifying recognised overseas pension schemes (QROPS) allow you to transfer your UK pension funds overseas and can provide several benefits for expats. Read our guide to QROPS to learn more.Speak to a pension expert
Building up enough retirement savings and setting yourself up financially requires careful planning.
But if you plan on retiring overseas, there are additional things to consider, such as what to do with your UK pension pot.
Should you leave your pensions in the UK or transfer them to an alternative arrangement?
For those planning on retiring overseas, a QROPS can provide several benefits for those with UK pension schemes, including greater flexibility and control over their retirement savings.
This guide will take an in-depth look at QROPS. We will look at what they are, their benefits and other key information to help you better understand your pension options if you plan to retire abroad.
What is a QROPS?
QROPS stands for qualifying recognised overseas pension scheme.
A QROPS is an overseas pension scheme that satisfies the rules set out by HMRC, allowing them to receive transfers from UK-registered pension schemes.
To be ‘qualified’ as a QROPS by HMRC, overseas pension schemes generally need to have similar rules to a UK-registered scheme. For example, being unable to access pension benefits until age 55.
QROPS are often used by those who have built up a UK pension fund but plan to retire overseas. As they can receive transfers from UK-registered pension schemes, they allow you to take your pension savings with you rather than leaving them in the UK.
What are the benefits of a QROPS?
A QROPS can offer potential benefits for expats planning to retire overseas.
However, the benefits of a QROPS will depend on several factors, such as your location and where the QROPS is based.
Some of the potential advantages of a QROPS include:
Pensions in the UK are liable for Income Tax if your total annual income exceeds your Personal Allowance, currently set at £12,570 for 2023/24.
The rate of Income Tax you pay depends on your Income Tax band but can be between 20 and 45%.
However, with a QROPS, your pension may be taxed more favourably or avoid Income Tax altogether, depending on your location.
Those living in a country such as the UAE with a double taxation agreement (DTA) with the UK and a zero Income Tax rate may be able to access their pension without any tax penalties.
Read our guide on pension tax to learn more.
Inheritance Tax advantages
Like British pension funds, QROPS are generally exempt from Inheritance Tax (IHT). That is because a QROPS does not form part of your overall estate.
However, IHT rules for the country where you are a tax resident may apply. It is recommended that you seek expert tax advice to ensure you are as tax-efficient as possible.
Pension Commencement Lump Sum (PCLS)
A QROPS will generally offer a pension commencement lump sum (PCLS) of up to 25% or 30% of the value of the pension fund (depending on the jurisdiction in which the QROPS is operating). The pension fund balance is usually applied to provide a drawdown pension.
UK pensions are paid in Sterling. This means if you leave your pension in the UK, it will need to be converted to the local currency.
Poor exchange rates and fees can have a negative financial impact on your pension pot. However, a QROPS can help you avoid exchange rate risk by taking your retirement income in a currency of your choice.
If you have multiple pensions, a QROPS can be used to combine them – this is called consolidation.
Pension consolidation simply means combining more than one pension into a single pot. Doing this can make your retirement fund easier to manage and may provide other benefits.
Compared to traditional UK-based pension schemes, QROPS typically offer a wider range of investment options. However, the options available will often depend on the operating jurisdiction of the QROPS.
Some of the investment options may include:
- Shares (equities)
- Government and corporate bonds
- Cash deposits
- Commercial property
- Investment funds
Certain assets cannot be held in a QROPS. For example, residential property and tangible assets, such as art and wine, are prohibited.
While these assets cannot be held in a QROPS, they can be transferred to a QNUPS.
UK pension transfer and tax rules explained
A 10-year reporting requirement is in place when transferring a British pension scheme to a QROPS.
During this 10-year reporting period, the QROPS provider must report any unauthorised pension withdrawals to HMRC. This may include accessing funds before the age of 55. Any unauthorised withdrawals could result in a 55% tax charge.
QROPS pension transfer charges
A 25% overseas transfer charge applies to the amount transferred to a QROPS. However, there are exceptions.
Expats can make tax-free transfers if:
- You are a resident in the same country as the QROPS you are transferring to
- You are a resident of a country in the European Economic Area (EEA), and the QROPS is based in another EEA country or Gibraltar
- The QROPS you are transferring to has been provided by your employer
Can any UK-based pension be transferred?
Most types of pension schemes can be transferred to a QROPS. This includes:
- Private defined contribution pensions
- Workplace pension – sometimes known as occupational pension schemes
- Defined benefit pensions
Be aware that by law, you must seek advice from an FCA-regulated financial adviser if you wish to transfer a defined benefit pension with a value greater than £30,000. The adviser must have permission for the activity of ‘advising on pension transfers and pension opt-outs’.
QROPS and the pension lifetime allowance
The lifetime allowance (LTA) is the maximum pension benefit you can build up over your lifetime before paying tax.
The current lifetime allowance (LTA) for the 2023/24 tax year is £1,073,100. Going over the LTA will usually result in a tax charge.
However, it is worth noting that from 6 April 2024, the LTA for UK-registered pensions is being abolished.
QROPS vs SIPPs
One of the other main options for expats looking to transfer their retirement savings is a self-invested personal pension, or SIPP for short.
Both are pension wrappers, and both have their pros and cons.
A SIPP offers greater control over your retirement fund as you pick your own investments. But depending on your country of residence, a SIPP may not provide the same favourable tax treatment that a QROPS offers.
However, there are no transfer charges when transferring your pension to a SIPP. But with a QROPS, there may be a 25% charge for overseas pension transfers unless you meet specific criteria.
Pension planning with Holborn Assets
Before committing to a pension transfer, it is strongly recommended that you speak to a financial adviser who can help you make the right choice based on your needs and circumstances.
If you already have a QROPS, a pension review can ensure that it is still performing in line with your goals or whether better options are available for your pension fund.
So whether you are planning to retire overseas or want to better understand your pension options, we can help.
At Holborn Assets, we provide independent, professional advice tailored to your needs and goals.
Our experienced advisers work closely with clients, helping them better understand their retirement options and develop strategies to help them build towards a more secure financial future.
Get the financial advice you need to help you maximise your pension income and make the most of your golden years. Book a free, no-obligation meeting today with one of our pension experts and learn how we can help you.