QROPS is an acronym which stands for Qualifying Recognised Overseas Pension Scheme and is a method of transferring UK pension funds to a pension scheme overseas without incurring a tax charge.
“Qualifying” refers to the fact that the overseas scheme must qualify with the conditions set out by HMRC (Her Majesty’s Revenue and Customs).
The scheme must be set up outside the UK and not be a registered pension scheme. The scheme must meet all the following conditions:
- tax recognition conditions
- regulated pension scheme conditions
- recognised overseas pension scheme conditions” (www.hmrc.gov.uk)
“Recognised” means that HMRC have recognised rather than approved the scheme and have added it to the QROPS list. This is a list of QROPS published by HMRC but only those that ask to go on the list are added. A UK scheme should check that the scheme is on this list before making a transfer within 24 hours of transfer, otherwise a scheme sanction charge of 15% will apply to the UK scheme.
QROPS were established on April 6, 2006 known as “A” Day, when the British Government radically overhauled its pensions system as part of pension simplification measures.
Before this legislation was introduced, UK pensions could only be transferred to the country in which the member resided. However, the European Union ruled that the UK had to allow the free movement of pension schemes and as a result QROPS were created to enable free choice of jurisdiction.
Restrictions have been placed upon the QROPS legislation by HMRC to ensure that for at least the first five years of non-UK residency of the pension fund member the scheme acted similarly to UK pension schemes.
Many of the benefits of a QROPS will apply once the member is no longer in the UK and becomes a non-UK tax resident. Most importantly, the pension income will no longer fall within the UK tax net. Also the lifetime allowance (LTA), which currently limits the pension fund to £1.25 million before tax is charged, this does not apply to any investment growth within the QROPS following transfer.
Further benefits include:
- Protection of assets from creditors and pension sharing in divorce
- Currency options to give the choice of currency for the fund to be held in to avoid exchange rate fluctuations
- Multiple pension schemes can be consolidated into one
- Flexibility of investment
In order to make QROPS schemes comply with HMRC rules, an unauthorized payment regime was introduced which lasts for five full tax years non-UK residency of the member.
After five years of non-UK residency further benefits will apply because the scheme will then come outside the unauthorized payment regime in the UK and fall under local rules. These benefits will include:
- Up to a 30% pension commencement lump sum as opposed to 25% in the UK.
- The UK tax on death will no longer apply and therefore beneficiaries will receive 100% at any age.
- The potential retirement age may fall from 55 in the UK to 50.
QROPS are available to both UK and non-UK residents, although not all the advantages will apply unless the member has left the UK and all types of pension schemes can be transferred including personal pension schemes, eg SIPPS (Self Invested Personal Pension Schemes) as well as company schemes, both defined benefit (final salary) and defined contribution/money purchase, including SSAS (Small Self Administered Schemes).
Basically any scheme that has a transfer value can be transferred, the main exception would be where an insurance company annuity had been purchased, such as when benefits are taken in a final salary scheme.
There is no prescribed minimum or maximum for a QROPS, although due to the triviality rules in the UK allowing full encashment of schemes below £30,000 it is generally accepted that it is not efficient to transfer schemes below this level – and charges may appear high against benefits for smaller transfer values.
There is no maximum fund size that can be transferred although, should a scheme be greater than the lifetime allowance and not protected with either primary or enhanced protection, then a lifetime allowance charge may be applied. Any amounts transferred above the lifetime allowance without protection will be taxed at up to 55%.
Investments into QROPS are similar to those allowed in a SIPP and can include most types of investment. Notable exceptions are any movable property such as residential property, fine wines, jewellery, from which the member can obtain enjoyment.
QROPS jurisdictions, by nature of the QROPS legislation are relatively similar. However, there are some small differences in the way they operate in terms of what they allow as investments and what tax they charge on pension income.