QROPS, Qualifying Recognised Overseas Pension Scheme

Estimated reading time: 20 minutes

QROPS is a type of pensions designed to cater to the needs of British pension holders that move out of the UK and reside in another country.

Over the years, Qualifying Recognised Overseas Pension Scheme have expanded to cover many countries worldwide.

What is QROPS

QROPS stand for Qualifying Recognised Overseas Pension Scheme and is a retirement package based outside of the UK that has similar rules to a UK registered pension scheme.

One of the benefits for expats is that registered pension schemes can transfer funds into Qualifying Recognised Overseas Pension Schemes free of tax – up to the limits of the lifetime allowance

Qualifying means the QROPS must obey UK tax law, be open to residents in the country where it is based and not pay benefits to anyone under the age of 55 except in special circumstances.

Recognised refers to Britain’s Her Majesty’s Revenue and Customs (HMRC) agreeing the QROPS is compliant with UK tax and pension rules that govern the scheme.

Overseas means the scheme is administered from outside of the UK.

Pension Scheme denotes the QROPS follows the rules of UK registered pension schemes.

QROPS and Brexit

The QROPS transfer window may close when Britain has left the European Union for good on December 31, 2020.

QROPS have different rules in Europe because membership of the EU demands the UK allows free movement of people and capital – which includes pension funds.

This ends when the transition period under the Withdrawal Agreement expires on December 30.

At this time, there is uncertainty about what will happen to QROPS after the transition period, although offshore pensions are likely to continue under the current rules.

Who has a QROPS?

Thousands of British expats and fewer international workers who have pension rights after working in the UK have QROPS pensions.

The latest data from HMRC reveals nearly 128,000 people have transferred UK pensions worth £11.4 billion into a QROPS since the scheme opened on April 2006.

The table below plots the number of QROPS transfer year by year, together with their values.

QROPS Transfers since April 2006

Below is a table showing the number of QROPS transfers made each year and the value of the transfer in British pounds.

Why Might you Consider a QROPS?

If you live overseas permanently or are thinking of moving, then considering a QROPS should be part of your financial planning.

QROPS are complicated packages and are not a one-size-fits-all solution for every expat.

Some good reasons for discussing the option with a financial adviser include:

• You may want your pension in the same country as you live when you retire so you are not suffering from foreign currency exchange fluctuations by receiving retirement income in Sterling but changing to another currency before you spend the cash
• Keeping on top of tax and pension rule changes is easier if they happen in the country where you live
• You work for a multinational organisation or employer that offer QROPS and you find the benefits attractive
• Your UK pension is close to maxing out the lifetime allowance and you want to keep the pot intact without paying hefty penalties
• You gain tax advantages from drawing your pension in the country where you now live
• You want to move your pension savings out of reach of policy changes that the UK government may make
• Your QROPS would allow you earlier access to your retirement savings
• You are in poor health and a transfer would give more income
• You do not need to provide a pension to a spouse or other loved one if you die before them or your pension doesn’t offer this benefit
• You want more freedom to leave unspent pension money to your loved ones
• You are worried that your employer is in danger of going bust and you want to safeguard your retirement savings

These reasons present an upside to QROPS transfers, but they can come with downsides, too.

For instance, you might give up valuable guarantees or benefits included in your current pension package that cannot be replaced in a QROPS.

Why You Might Not Consider a QROPS

You might have a clunky, old pension that may not pay out until you are 60 or 65 years old, and even then does not embrace the new world of pension freedoms that let you take your money to spend as you wish.

But you may be giving up some valuable guarantees or benefits, that a QROPS cannot replace, such as:

• Retirement income is guaranteed based on length of service and final or career average salary locked into cost of living increases if you have a direct benefit pension
• The pension is professionally managed for you
• A guaranteed annuity rate that’s way above the current rate offered by providers
• A spouse’s pension should you die before them
• Moving your retirement savings to a QROPS may not be cost-effective

Tips for Finding the Right QROPS

Here’s a timely wealth warning that you must consider when researching a QROPS transfer – show the door to any adviser who says you need a QROPS without carrying out a financial review because they are looking for commission and do not have your best interests at heart.

Any Qualifying Recognised Overseas Pension Scheme provider will expect to see a recommendation written off by a suitably qualified pensions expert that demonstrates why their product is the one for you.

QROPS are foreign financial products based on a HMRC blueprint but includes compliance with local rules and regulations. Not all will match your personal profile and financial needs.

This review is a step-by-step process.

Look for the Right Adviser

This is where the experience and qualification of your financial adviser comes into play.

You want an independent financial adviser (IFA) who can give whole market advice. That means your adviser is not tied to a provider or working for a firm with a narrow range of QROPS options.

Your QROPS choice may be limited to one or two providers or a much longer list, depending on where you live, but you don’t want that list limited because you IFA is tied and can only offer restricted advice, because they may miss a better QROPS off the list that is perfect for you.

Tied advisers can look independent but are really IFAs who work for a network which limits the QROPS they can offer.

You can check out the status of your adviser by asking for their licence details. Call their regulator or search their website to ensure they are qualified to give you the advice you seek.

Don’t forget to ask them about their QROPS transfer experience.

Some countries have special rules about who can recommend a QROPS. In Australia, for instance, only a locally licensed IFA can give pension advice.

Benchmarking your Pension

Benchmarking is an important factor in your quest for the perfect QROPS.

The exercise determines the current and likely future performance of your UK pension and compares the results with those of a QROPS.

After all, it’s no good moving your retirement savings to a package that  is unlikely to deliver the results you are looking for.

Besides moving or consolidating UK pension funds, expats can all switch or upgrade to a new QROPS.

The study considers investment performance, charges and inflation; the loss of any guarantees or benefits and your personal financial goals.

To ease the process, you should ask your current pension provider for a Transfer Value Analysis (TVA). The analysis should include any early exit charges and the value of the fund.

If you don’t know your UK pension details, you must first find your lost UK pension.

Defining your Residence and Tax status

Where you are resident for tax is an important factor in sourcing your QROPS. Understanding your residence and domicile status is the first step in planning your UK pension transfer.

QROPS are not an option for UK taxpayers, so you must determine your tax residence before transferring a pension out of the UK.

If a transfer is ruled an ‘unauthorised pension withdrawal’ by HMRC, you face a penalty of at least 40% of the value of the money moved to the QROPS.

The point to consider is rules determine if you are an expat, not you.

Many British workers on assignment overseas call themselves expats, but fully intend to return home after two or three years working in another country. They are not expats and are likely to keep their UK residence for tax.

Typical ties these expats retain are homes in the UK, bank accounts, credit cards and a UK driving licence.

These expats should consider a self-invested personal pension (SIPP) instead of a QROPS.

Expats for tax purposes are people that have cut their ties with their home country and now live permanently overseas and have no intention of returning to Britain.

Once your expat status and tax residence is settled, you need to think about the tax you might pay on your retirement income and how tax rules in your new home country interact with those in the UK.

QROPS pay gross benefits that are free from tax in the UK but subject to tax in the country where you are resident.

Estate planning is another financial priority.

QROPS are free from inheritance tax in the UK, but your beneficiaries may pay tax on inheriting a cash lump sum from your pension.

Another issue to consider is how much investment risk you are prepared to take. The more risk you show as an investor, the better your likely return – but if things go wrong, you could also make a bigger loss.

Beware of sharks looking to siphon off your hard-earned pension savings with fly-by-night unregulated investments like hotel resorts, plantations and fine wines.

Only sophisticated investors should consider unregulated offers. A sophisticated investor is generally defined as someone earning £100,000 or more a year with net assets of at least £250,000.

Picking your QROPS

This is where the experience and qualification of your financial adviser comes into play.

You want an independent financial adviser (IFA) who can give whole market advice. That means your adviser is not tied to a provider or working for a firm with a narrow range of QROPS options.

Your QROPS choice may be limited to one or two providers or a much longer list, depending on where you live.

But you don’t want that list limited because you IFA is tied and can only offer restricted advice, because they may miss a better QROPS off the list that is perfect for you.

Tied advisers can look independent but are really IFAs who work for a network which limits the QROPS they can offer.

You can check out the status of your adviser by asking for their licence details. Call their regulator or search their web site to make sure they are qualified to give you the advice you are seeking

Now, you can look at costs.

Choosing a QROPS is not a money-saving exercise, but once you have figured out what your financial objectives are, if you have a short list of schemes all offering the same options, then cost comes into play.

Research  set up costs, ongoing administration charges and fund management fees.

These charges look benign as a ‘1% of the annual fund’ but when you translate that to a cash value and compound the interest every year, they equate to a large slice of your savings regularly disappearing.

Can I Transfer My Pension to a QROPS?

You cannot transfer money from some UK pensions to a QROPS – here are the guidelines:

Pensions You Can Transfer to a QROPS

• A defined benefit or defined contribution workplace pension offered by an employer
• A personal pension, including SIPPs

Pensions you can’t transfer to a QROPS

• A civil service or public sector pension that is underwritten by the government and has no fund value
• The state pension (don’t forget to claim your UK state pension as an expat)

£30,000 Fund Advice Rule

Every retirement saver looking to transfer a direct benefit pension fund to a QROPS must take professional advice before moving the money by law in the UK.

Does the Size of My Pension Fund Matter?

No official limit is placed on the fund size when transferred into a QROPS, but providers promote products that restrict some QROPS to large or small funds.

Some providers offer ‘QROPS lite’ that cater for funds of less than £100,000 that offer limited investment opportunities and other features to keep costs down.

Others will only deal with transfers of £100,000 or more.

How to Transfer Your Pension to a QROPS?

QROPS transfers involve endless form-filling for the pension scheme you are leaving, HMRC and the QROPS provider you are joining.

Your IFA should take care of the red-tape – but for your information, the details you need to provide are laid out on HMRC’s Form APSS263

Your transfer is taxed at 25% of the transfer fund value if you don’t provide all the information the form asks within 60 days of requesting the transfer.

If you’re under 75, your UK pension scheme administrator will calculate the percentage of your lifetime allowance taken up by the transfer – and if the amount is above your lifetime allowance, you will face a tax bill.

Download our guide to pension transfers for expats. Covering your options including QROPS transfers.

Overseas Transfer Charge and your QROPS

If you pay the QROPS overseas transfer charge depends on where your QROPS is based.

You don’t have to pay the tax if you asked for a transfer to a QROPS before March 9, 2017 or if you transfer to a QROPS provided by your employer.

The overseas transfer charge rules differ if you live in the European Economic Area (EEA) or elsewhere in the world.

The charge works out as 25% of value of the fund transferred to a QROPS.

The charge is levied on QROPS to QROPS transfers as well as UK pension to QROPS transfers.

You Transfer to a QROPS in the European Economic Area (EEA)

You pay the charge if you live outside the EEA or move to live outside the EEA within five years of making the transfer, otherwise you don’t pay tax.

The charge is refunded if you move to an EEA country within five years of a transfer to a QROPS outside the EEA. The money is returned to your QROPS.

Countries currently offering QROPS that are not subject to the overseas transfer charge are:

• Austria
• Belgium
• Bulgaria
• Denmark
• Finland
• Germany
• Gibraltar
• Ireland
• Latvia
• Liechtenstein
• Luxembourg
• Malta
• The Netherlands
• Norway
• Sweden

QROPS Countries Outside the EEA

You don’t the overseas transfer charge if you live in the country where your QROPS is based. Otherwise you pay tax.

If you move countries within five years of the transfer, you can claim a refund if you’ve moved to the country where your QROPS is based.

You must pay 25% tax on your transfer if you’ve moved away from the country where your QROPS is based.

Countries outside the EEA are subject to the transfer charge if you do not live in the same country as the QROPS is administered – these are:

• Australia
• Barbados
• Guernsey
• Hong Kong (China)
• India
• Isle of Man
• Jersey
• Kenya
• Mauritius
• New Zealand
• South Africa
• Switzerland
• USA

QROPS Benefits

The advantage of transferring a UK pension to a QROPS are the tax and financial benefits an offshore pension can offer expats.

QROPS are tax-efficient and flexible pensions that can deliver a host of benefits for retirement savers.

Retirement Age

QROPS members can start to enjoy QROPS benefits from the age of 55, and even earlier if they qualify for:

• A serious ill-health lump sum
• A short service refund lump sum
• A refund of excess contribution lump sum if too much is paid into a pension by mistake
• A winding-up lump sum if a small pot scheme is wound up

Tax-free Lump Sums

QROPS can pay the standard UK 25% tax-free lump sum plus a percentage of any fund growth while the money is in the QROPS.

The additional tax-free lump sum depends on investment choices made by the QROPS member and local pension rules but QROPS can be as much as 30% of the value of the pot.

No tax-free lump sum is allowed if a UK pension already in drawdown is switched to a QROPS.

Flexible Access

Flexible access rules apply to Qualifying Recognised Overseas Pension Schemes in the same way as UK pensions.

For investors, that means funds are available to access from the age of 55 to spend as they wish.

However, as in the UK, providers can choose not to allow flexible access, so if this is an important aspect of your retirement planning, when carrying out due diligence, do not assume your QROPS comes with this facility.

Benefits Paid Gross

All QROPS benefits are paid gross – that’s without the deduction of income tax.  Any tax due is paid in the country where the expat is resident.

So, expats living in a zero-tax country, such as the Gulf States of Dubai or Abu Dhabi would receive their QROPS payments gross and have no income tax to declare.

Currency Choices

QROPS can be set up in many major currencies, depending on the provider and where they are based. Popular currencies are the British Pound, US dollar and euro, but many more are available.

The benefit is if the QROPS pays benefits in your local currency, you avoid the issues of foreign currency exchange fluctuations.

QROPS and the Lifetime Allowance

The lifetime allowance is a limit the UK government places on how much pension savings an individual can have during their lifetime.

The 2020-2021 tax year’s limit is £1.0731 million.

If you are under 75 years old and want to transfer your UK pension to a QROPS, the value of the fund is tested against the lifetime allowance. Any amount over the current cap is taxed at 25%.

The bonus is once the funds arrive in the QROPS, they can grow free of any lifetime allowance restriction. This is useful if pension savings are close to the limit as expats can switch them out to a QROPS before any tax is due and let the fund continue to grow unhindered.

Am I Free of UK Rules and Taxes on my Pensions if I Transfer?

HMRC expects expats and their QROPS providers to provide information about where they live and any financial changes for 10 years after setting up the pension.

The rules are there to stop abuses of QROPS benefits, such as taking money before the age of 55 or holding a QROPS outside of the country where you live if you are not an EEA resident.

HMRC is quick to impose penalties for breaking the rules, which start at 55% of the value of any unauthorised withdrawal or transfer.

No tax is due on a transfer in to a QROPS and any money coming from a UK pension that has received pension contribution relief is paid in full without any refund to HMRC.

Once in a QROPS, the fund grows free of tax.

QROPS benefits are paid gross of income tax, but tax may be due in the country where the retirement saver is tax resident.

QROPS are also outside of the reach of HMRC for inheritance tax and beyond the British courts for including in divorce settlements.

What is the QROPS List?

The HMRC QROPS List is a database of the offshore pensions that have confirmed that they comply with QROPS rules.

Savers and providers must check their QROPS is on the current list before making any transfer into the pension.

If not, the transfer is considered an unauthorised withdrawal and taxed at 55% of the value of the money that is moved offshore.

However, inclusion on the list means the provider has self-certified their pension complies with HMRC’s Qualifying Recognised Overseas Pension Scheme rules. This is not the same as HMRC approval of the scheme, as there is no guarantee HMRC has confirmed compliance.

The list is published on the first and 15^thday of the month – but interim lists can be posted at any time.

QROPS Jurisdiction

Places where QROPS are administered from are termed ‘financial jurisdictions’ and a set of rules applies to how somewhere joins the list.

To become a QROPS jurisdiction, a country outside the EEA must pass some tests:

• The regulatory requirements test – this looks at how the QROPS is administered and regulated
• The tax recognition test – the QROPS must be open to any resident of the country where it is based and all benefits paid must be subject of tax, even if the tax rate is 0%
• The pension age test– no benefits are paid to anyone under 55 years old unless special conditions apply

How are QROPS Structured?

Most QROPS follow the same structure, subject to tweaking of the rules in line with local regulations.

• A master trust sets powers, roles and responsibilities of trustees running the QROPS
• The trustee must be outside the UK
• The master trust allows wide-ranging investment powers across several asset classes, such as cash, bonds, property, hedge funds, equity and commodity funds.
• The trustee holds investments for members, often through an investment manager.
• The trustee pays benefits from the QROPS to the member.

QROPS FAQs for Expats

Expats often ask questions about QROPS and how they work – so here are the answers to some of their most common queries:

Related Information

Below is a list of related articles you may find of interest.

• Expat Financial Advice
• QNUPS
• SIPP