The QROPS Overseas Transfer Charge is an exit charge for retirement savers transferring money from a UK pension fund to a specialist offshore pension for expats.
The charge introduced by former Tory Chancellor Phillip May applies to transfers into or between a Qualifying Recognised Overseas Pension Scheme (QROPS) taking place on or after March 9, 2017.
The aim was to penalise retirement savers setting up a QROPS in one country while living in another as a tax avoidance strategy – these are called third-party transfers.
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How much is the Overseas Transfer Charge?
The Overseas Transfer Charge (OTC) has a fixed rate of 25% of the value of the funds transferred.
However, there are several QROPS transfers for expats that fall outside the rules to avoid the charge completely.
What is a QROPS transfer?
OTC rules are clear that the charge is triggered by something more than a casual inquiry about QROPS transfers.
A retirement saver must give the fund manager a written instruction to transfer a specific sum or percentage of a fund to a named offshore pension provider included on the HM Revenue & Customs QROPS List
QROPS OTC and the European Economic Area
Any retirement saver living in the European Economic Area (EEA) can transfer money into a QROPS run by a financial firm anywhere in the EEA.
But expats living in the EEA who want to switch pension money should keep an eye on Brexit.
Currently, the transition period under the Withdrawal Agreement between Britain and the European Union is set to end on December 31, 2020. OTC rules may change from the date, although the UK government has not hinted what will happen to QROPS transfers from then.
Example: Alan left the UK to retire in Spain and transferred his UK pension fund to a Malta QROPS after March 9, 2017.
As both Spain and Malta are in the EEA, the transfer is not caught by OTC rules
Example: Alan left the UK to retire in Spain and transferred his UK pension fund to a Hong Kong QROPS after March 9, 2017.
As Hong Kong is outside the EEA and a third-party country, the transfer attracts the OTC. The same would apply if Alan moved to Hong Kong and set up a QROPS in an EEA country.
QROPS countries within the EEA
Fifteen countries within the EEA are currently running QROPS offshore pensions for expats. They are:
- The Netherlands
QROPS OTC and Non-EEA Countries
Under OTC rules, it’s OK for an expat to move to a country outside the EEA and to transfer money from a UK pension or another QROPS into a local QROPS scheme.
Example: Alan left the UK to retire to Dubai and transferred his UK pension fund to a Hong Kong QROPS after March 9, 2017.
As Alan and his QROPS are in separate countries and both are outside the EEA, the OTC is charged.
Example: Alan left the UK to retire to Australia and transferred his UK pension fund to an Australia QROPS after March 9, 2017.
The transfer avoids the OTC as Alan and his QROPS are based in the same country.
QROPS countries outside the EEA
Thirteen countries outside the EEA are currently running QROPS offshore pensions for expats. They are:
- Hong Kong, which cover all of China
- Isle of Man
- New Zealand
- South Africa
QROPS Transfer When The OTC Does Not Apply
Some QROPS transfers are automatically outside of the OTC rules and are made free of the charge:
International organisation QROPS – This does not mean a multinational corporation but an organisation like the United Nations, the World Health Organisation, or the like.
The definitive test is applying the International Organisations Act 1968, which says an international organisation must:
- Have the UK and other countries as members
- Not have the UK as a member but at least two other countries should be members and the organisation has an office in the UK
- Be an international conference held in the UK attended by the UK and other countries
- Be an international court or tribunal
Overseas public service pension
This exemption applies when the scheme is set up for public sector workers and the retirement saver is employed by the employer running the scheme
Overseas workplace pension
A similar exception to the overseas public service pension. In this case, the retirement saver must work for the employer running the scheme.
Pensions falling into this category would be workplace schemes for multinational companies.
Overseas Transfer Charge 5-Year Rule
In some cases, the overseas transfer charge is payable for up to five years after a QROPS transfer even if the money was not due at the outset of moving the money.
This can happen when the circumstances of the retirement change after making the first move.
‘Five years’ means five full tax years from the date of the transfer, so if a transfer was made in September 2020, the five full tax years would not end until April 5, 2026, as the part first year is ignored in calculating the term.
During that time, the retirement saver must tell the QROPS provider of any change of residence within 60 days of moving in.
If a retirement saver transferred pension money into a QROPS that was subject to the overseas transfer charge, but the charge would not be due had the new circumstances existed from the start, HMRC will make a refund.
HMRC will also refund any wrongly paid overseas transfer charge, for examples, if the charge was not due or charged by mistake.
Repayments are only made during the five-year reporting period.
QROPS Overseas Transfer Charge FAQ
The Overseas Transfer Charge is applied to expats moving their retirement savings to a QROPS or switching their money between QROPS.
However, the charge only applies in certain circumstances, which prompts a lot of questions from expats worried about losing some of their savings if they make a mistake while switching providers.
Here are the answers to some of their commonly asked questions:
The QROPS overseas transfer charge is a set of rules determining if an expat must pay a penalty for moving pension savings to the wrong QROPS.
No., few expats pay the charge if they follow the OTC rules
This depends on where you live. If you live in the European Economic Area (EEA), then moving money to a third party QROPS in another EEA country is OK. However, if you live outside the EEA, a third-party transfer will attract the overseas transfer charge unless the move is automatically exempt.
Exempt transfers are those where the retirement saver and QROPS are both in the EEA; transfers to QROPS run by international organisations; transfers to overseas public service pension schemes and scheme run by multinational employers.
The pension scheme administrators holding your savings must make reports to HM Revenue & Customs about you and your QROPS transfer. The OTC can become due for up to five years when circumstances change, so HMRC tracks your retirement money for that time.