Since 2006, QROPS have been a useful tax tool for those planning to leave the UK, or those who already live overseas. At their heart QROPS enable a UK pension to be moved into an overseas pension scheme, usually for favourable tax reasons. The schemes themselves are self-certificating, but many are recognised by HMRC which keeps a register of those which it has been advised meet the current QROPS conditions.
Is there a limit on how much can be transferred?
QROPS can be a useful expat tax planning tool if you intend to live overseas and want to protect your retirement plans. In the past one of the key reasons behind expats switching their pensions to QROPS was to bypass a tax charge known as the Lifetime Allowance (LTA). Until 2023, UK pensions suffered this penalty which saw up to 55% tax being charged if more than £1.073m was saved into the pot. The LTA charge was removed for the 2023/24 tax year and from 6 April 2024 no longer applies at all, effectively eliminating any tax charge for those saving significant amounts into pensions.
If you’re still considering a QROPS it’s also worth noting that in 2017 an Overseas Tax Charge was introduced by the UK Government. This has reduced the number of QROPS transfers taking place. The charge, which is levied at 25% of the total pension pot, applies unless you and the QROPS meet certain conditions in terms of residency and jurisdiction. More details are included in the Conditions before transferring section below.
QROPS offer a means of mitigating additional UK tax charges if you exceed the LTA. At the point of transfer your pension funds are checked against the LTA as a one-off event. After this point the funds won’t be tested again, even if your pension pot grows and exceeds the limit. As a result, a QROPS can be a useful expat tax planning tool if you intend to live overseas, are nearing the current LTA and want to protect any future investment growth.
Choosing a qrops pension transfer
Transferring a pension to a QROPS is a significant decision and it is always sensible to carefully consider your options and seek advice from an expert.
Your pension is likely to fall into one of two types: a defined contribution scheme, a pension pot based on how much is paid in, or a defined benefit scheme, which provides a guaranteed pension on retirement.
Do note that if you have a defined benefit pension scheme or ‘safeguarded rights’ worth more than £30,000, you are required by law to seek financial advice from a qualified adviser before transferring.
Considerations before transferring
If you are considering a transfer into a QROPS there are a number of key points which are useful to take into account:
- Possible tax charges: in 2017 changes were made to QROPS rules meaning that a 25% transfer tax can be charged unless you and the new scheme are in the same jurisdiction or, your employer is multi-national and already partakes in the QROPS scheme to which you are transferring. A useful point to note is that the EEA is classed as one jurisdiction, which gives more flexibility as you can, for example live in Malta with a QROPS in France, and not be subject to the charge.
- Estate planning: defined benefit schemes typically offer more restricted or limited outcomes for your beneficiaries on death. Transferring your pension or pensions to a QROPS, may offer more favourable estate planning options such as more flexibility as to who can benefit and more options in the way in which your benefits can be distributed on death, ie a cash lump sum.
- Tax implications: UK pensions are subject to Income Tax and so transferring to a QROPS may be useful from a tax perspective. You will need to consider any double taxation agreement (DTA) in the jurisdiction of your QROPS and the country in which you live, which will determine how your pension is taxed and can prevent double taxation. At this point specialist tax advice can be a useful step.
- Currency: it is worth considering how you will draw your pension, especially if you need to exchange your pension income into another currency; this action may incur additional costs. Conversely you can consider this a positive benefit giving you the ability to utilise any foreign exchange opportunities by holding your pension in a different currency to GBP.
- Early retirement: Your existing UK defined benefit pension scheme is likely to have penalties for accessing your benefits prior to the scheme pension date. Moving your funds to a QROPS would give you the freedom to access your pension benefits at age 55 without penalty.
- Consolidating funds: if you have lived or worked overseas or in a number of different counties, you may have a range of pension pots. Consolidating these into one QROPS may be more efficient and easier to manage.
Pension planning, especially when involving QROPS or other types of overseas pensions, can be complex. Our experience of expatriate tax and retirement options means we can help you navigate this complicated area of financial planning. To speak to one of our pensions experts please get in touch with your nearest office.
The information provided within this article is of a generic nature, which is not specific to your personal circumstances and should not be taken as advice or recommendation. Any tax treatment is dependent on the individual circumstances of each client and may be subject to change in future.
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