If you are considering moving overseas or already live abroad, generally you’ll have two options when it comes to a UK pension scheme that you hold.
The first is to leave the pension where it is. If you’re already taking your benefits from a workplace or personal pension, these will still be payable to you as before. Or if you’re not yet at retirement age or haven’t started drawing your pension benefits, you can either carry on contributing into the pension (albeit the tax relief you’re allowed may be lower or not available at all), or you can stop making payments into the plan, but still access the money when you would normally, usually from age 55.
The second option that may be available is to transfer your UK pension into a suitable overseas pension scheme, known as a QROPS. This isn’t a decision to be taken lightly and getting financial advice is strongly encouraged before moving ahead – indeed, advice must always be sought for transfers from some schemes. But with some overseas schemes, switching into a QROPS could offer flexibility and benefits that might not be available if your pension remained on UK shores.
What is a QROPS pension?
A QROPS – short for qualifying recognised overseas pension scheme – is an overseas pension scheme that HM Revenue & Customs (HMRC) considers eligible to accept transfers from pension schemes that are registered in the UK.
To be classified as a QROPS by HMRC, an overseas scheme will normally need to have similar characteristics to schemes from the UK. One example might be not allowing access to pension benefits before the age of 55 – in line with when pensions can usually be accessed in the UK.
Pension schemes from various countries that believe they meet the necessary HMRC requirements to qualify as a recognised overseas pension scheme (ROPS) can ask to be included on a government-managed QROPS list, which is updated twice-monthly.
QROPS tax rules
Potential tax efficiencies when taking retirement benefits are one reason people consider transferring to a QROPS. However, transferring a pension overseas can have important tax implications, both in the UK and the country where your QROPS is located. Because of this, it’s usually worth getting qualified tax advice.
When you transfer
Whether tax is payable in relation to a QROPS transfer will ultimately depend on where your UK pension is being transferred to. However, generally:
A 25% tax or overseas transfer charge will be payable if:
- you transfer to a QROPS based in the European Economic Area (EEA) or Gibraltar and you live outside the UK, EEA or Gibraltar at that time or move to live outside these areas within five years of transferring.
- you transfer to a QROPS run outside the UK, EEA or Gibraltar and you don’t live in the country where your QROPS is based (if you move to that country within five years of transferring, the tax charge will be refunded).
- the information asked for on form APSS263 – which your UK scheme provider needs to advance the transfer – isn’t supplied within 60 days of your transfer request (you may be able to apply for a refund at a later date).
A tax charge isn’t payable if:
- the QROPS you transfer to has been provided by your employer.
- you live in the country where the QROPS is based.
- the QROPS is based in the EEA or Gibraltar and you’re resident in the UK, Gibraltar or an EEA country.
- you started the QROPS transfer process before 9 March 2017.
When accessing your pension
Transferring to a QROPS doesn’t automatically mean you’re exempt from UK tax rules. For a period of 10 years after a transfer completes, QROPS providers must report any unauthorised withdrawals from your pension to HMRC – this means if you take benefits from your QROPS before age 55, you could still face a 55% tax charge for doing so.
Since 6 April 2017, you need to have been resident outside the UK for 10 consecutive tax years before you can access a QROPS pension (before April 2017, the requirement was five consecutive tax years). However, even if you satisfy the 10-year rule, you may still fall under UK tax rules if you withdraw from a QROPS within five years of switching from a UK-based pension.
The tax you pay when taking an income from a QROPS will depend on the tax rules where you are resident and whether that country has a double-taxation agreement (DTA) with the country in which the QROPS is based. The existence of a DTA usually means you can avoid paying tax on your pension benefits twice, in two different countries.
If you’re classified as a UK resident when accessing benefits from a QROPS, this income is usually subject to UK income tax.
Because of the complexity surrounding QROPS rules on tax, you should seek professional advice and establish how much tax you’ll pay on your income before you finalise any transfer.
Can I transfer to a scheme that isn’t a QROPS?
You, your adviser and the provider of the UK scheme you want to transfer overseas should all check that the receiving scheme is acceptable to HMRC as a qualifying recognised overseas pension scheme.
If a transfer proceeds and the new scheme turns out not to be a QROPS, you should expect to pay a minimum 40% tax charge on the transfer. This could rise to 55%, with the potential for additional penalties, if the transfer is deemed to be an unauthorised payment.
Transferring to a scheme not recognised as a QROPS also makes it unlikely you’d receive formal compensation should anything go wrong with the scheme.
QROPS and the lifetime allowance
The lifetime allowance is the maximum you can accumulate in pension benefits during your lifetime before a 25% tax charge is applied. The limit for the 2021/22 tax year is £1,073,100.
If the value of the pension benefits you’ve built up is approaching the lifetime allowance, transferring to a QROPS could help minimise the amount you might have to pay as a lifetime allowance charge. Again, always seek professional advice so you are aware of the full situation for your individual circumstances.
Is a QROPS a good idea?
Transferring to a QROPS has the potential to deliver certain benefits but there are drawbacks to be aware of as well. The exact advantages and disadvantages of a particular QROPS will depend on the rules of the scheme and the country in which it is based.
Potential pros and cons of QROPS
|Tax on income||Your pension income might be taxed more favourably than in the UK.||You may end up paying a higher rate of tax on your income, or paying twice if a double-taxation agreement doesn’t exist.|
|Tax at time of transfer||It might be possible to transfer tax-free.||Some QROPS transfers attract a 25% tax charge.|
|Flexible access||Potential for more flexibility over how you access the money in your pension.||Greater freedom could increase the risk you exhaust your pension fund early (particularly if taking an annuity isn’t an option for your QROPS).|
|Investment choice||You may be able to access a wider range of investments than in the UK.||Potential for investments to be riskier and less heavily regulated than the options permitted in the UK.|
|Estate planning||Potential for more flexibility over who and how you pass your pension on when you die.||Local rules and taxes regarding inheriting pensions could be less favourable than in the UK.|
|Currency||If you live where your QROPS is based, you can receive your pension income in local currency, avoiding exchange rate risk and the cost of converting income from a UK pension that must be paid in sterling.||–|
|Protection||The country where your QROPS is based might offer more safeguards should a pension provider fail than are available in the UK.||Protections provided by the Financial Conduct Authority, Financial Ombudsman Service and Pensions Ombudsman to UK pensions won’t apply to a QROPS. Instead, you would need to approach the regulator in the country holding your pension.|
How to arrange a QROPS transfer
The path that you would normally take for any pension transfer will generally apply to a QROPS transfer, but in particular you’ll need to:
- Seek financial advice: This is sensible before transferring most pensions but if you’re considering a QROPS transfer, talking to a regulated pension adviser usually becomes even more important. You may also want to get advice from an adviser in the country where the QROPS is based. Where defined benefit and certain defined contribution schemes are being transferred, you will always need to get advice.
- Check the HMRC QROPS list: You need to make sure the overseas scheme you wish to transfer to is a qualifying recognised overseas pension scheme.
- Talk to your UK provider: It will need to confirm if a QROPS transfer is possible. There will also be transfer out forms that you’ll need to complete to get the transfer process underway.
- Contact the QROPS provider: The distance and language barriers may not make this easy, but you’ll need the scheme details and should check if they would be open to accepting an overseas transfer.
- Complete Form APSS263: If a QROPS transfer is an option you wish to pursue, you’ll need to download and complete Form APSS263 from the government website and pass it to your UK scheme provider.
- Be prepared to wait: Some pension transfers are completed quickly, while others aren’t. But transferring a pension overseas is likely to take time.
Avoiding QROPS scams
Unfortunately, the nature of QROPS transfers means pension scammers often target overseas pension transfers as a prime opportunity for exploitation.
In this respect, the importance of taking regulated financial advice cannot be overstated to make sure the scheme you’re transferring to is genuine (and, of course, to make sure a QROPS is a suitable choice).
Be aware of anyone who contacts you unexpectedly to offer their services to help transfer your pension overseas. And if the benefits of a scheme being offered as a potential transfer destination sound too good to be true, then the chances are that they probably are.
» MORE: Spotting a pension scam
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