Qualifying Recognised Overseas Pension Schemes (QROPS)

A Qualifying Recognised Overseas Pension Scheme (QROPS) is an overseas pension scheme that meets specific requirements set by Her Majesty's Revenue and Customs (HMRC), and it can receive transfers from UK Registered Pension Schemes (RPSs).

It was widely anticipated that the use of QROPS by UK residents would be restricted post-Brexit, by removing the relevant Overseas Transfer Charge (OTC) exemption and therefore introducing a 25% tax penalty on new transfers. 

However, amendments and modifications to the Finance Act to reflect ‘EU Exit’ regulations means that UK residents continue to be exempt from an Overseas Transfer Charge (OTC) when transferring their UK pension benefits to an EEA or Gibraltar based QROPS.

Why would a UK Resident transfer to a QROPS?

QROPS can be an attractive solution for members of UK pensions in the right circumstances, and an individual might consider transferring their UK pensions in the following cases:

  • When they plan to retire overseas and want to ensure that they can access their benefits flexibly, tax efficiently and in their local currency.
  • The tax profile of the country in which the member is resident at the time they draw retirement benefits from the pension scheme.
  • When the individual has or is at risk of breaching the Lifetime Allowance (LTA) and wishes to protect future investment growth from tax charges of up to 55% at retirement.

The standard Lifetime Allowance (LTA) limit is currently set at £1,073,100. UK pension savings above the LTA are subject to a charge of 25% or 55% at the appropriate Benefit Crystallisation Event (BCE).

Within UK legislation, a transfer to QROPS is a Benefit Crystallisation Event (BCE8).

A transfer to QROPS may also be beneficial to crystallise the pensions at the current value and mitigate LTA tax charges on future investment growth. The tax saving can be significant for individuals that are some years from retirement but where their pension fund value is already approaching the LTA.

LTA Planning Case Study

  • The client is a 48-year-old French national and UK resident with UK pensions totalling c. £700,000.
  • He is an investment professional and is targeting NET growth of 8% p.a. thorough a diversified Global Equity portfolio. If this level of growth is achieved, the client’s UK pensions will exceed the current standard LTA by age 54. The client intends to retire at age 60.
  • At age 60, it is estimated that the fund could have grown to c. £1,820,000, and this would result in an LTA charge of either £186,725 or £410,795 if the pensions remain in the UK and depending on if the excess above the LTA is designated to provide income or taken as a lump sum.
  • Our client transferred to a QROPS and crystallised c. 65% of his LTA with our advice and assistance. This meant he did not pay any LTA charges on transfer nor at retirement.
  • Our client still has c. 35% of his LTA left, which would otherwise be used up by investment growth, to make further tax-efficient UK pension contributions.
  • Within his QROPS, he has ‘open architecture’ investment options in multiple currencies. He can take 25% of the LTA as tax-free cash (UK tax residents) from age 55. Flexi-access drawdown (FAD) income can also be taken in line with his needs or a 100% lump sum. These can be paid gross subject to an applicable double tax treaty (DTT).

It has long been a common misconception that QROPS are only available to non-UK residents. This is not the case, and QROPS are available for UK residents and non-UK residents in the right circumstances.

Square Mile Asset Management can provide transfer and tax advice in this specialist, complex area. If you have UK pension assets above £250,000, please contact us for further information on our QROPS transfer advice service.

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