If you live abroad or intend to move abroad when you retire, you might be looking for strategies to ensure that you can still make use of your UK pension fund in retirement.
For British expats in this position, you generally have two choices: either leave your UK pension funds with your current provider or move your pension fund to an overseas pension scheme.
You may recently have read my guide to expat pensions and retirement planning in which I alluded to the possibility of using overseas pension schemes, also known as “QROPSs”, to support you in your retirement.
So, what is a QROPS and what could they offer to you? Find out everything you need to know right here in this complete guide to QROPS for expats.
What is a QROPS?
QROPS stands for “Qualifying Recognised Overseas Pension Scheme” and refers to pension schemes in countries outside the UK that meet certain HMRC criteria.
The government introduced QROPS pension legislation in 2006 to give greater freedom to individuals who wanted to transfer their UK pensions to a new country of residence. Crucially, the pension schemes must meet a strict set of rules laid out by HMRC.
Therefore, in essence, a QROPS is simply a UK-registered pension scheme resident in another country or jurisdiction.
There are QROPSs available in many countries, from Ireland to Kenya, and all the way to Australia.
Who might use a QROPS?
The primary reason that UK citizens tend to use QROPSs is to allow them access to their UK pensions if they decide to live abroad in retirement.
Foreign nationals who have lived and worked in the UK might also consider a QROPS, as it’s likely that they built up a pension in their time here.
If they wanted to then retire to their home country, a QROPS may present a good way for them to access any UK pension schemes they have at retirement age.
Benefits of transferring to a QROPS
There are various reasons why transferring to a QROPS can make economic sense.
Easy access to your pension pot
Firstly, a QROPS can give you easier access to your pension pot.
While Pension Freedoms in the UK allows you to access 25% of your pension at age 55 (rising to 57 in 2028) as a tax-free lump sum, a QROPS allows you to access up to 30% of your pot tax-free when you reach age 55.
This extra flexibility may allow you to reach your retirement goals with greater ease.
In the UK, any income you take from your pension will be subject to Income Tax at your marginal rate, depending on how much money you’re receiving each tax year.
Meanwhile, a QROPS will be subject to the tax rules in your country of residence. These rules may be more favourable to you, allowing you to make the most of your savings.
Similarly, drawing a UK pension while abroad may see you have to pay both UK Income Tax and your country of residence’s Income Tax, unless the country you live in has a double-taxation agreement with the UK government.
A QROPS would mean you wouldn’t owe UK Income Tax at all, removing double taxation as a possibility.
Greater access to different investments
As a QROPS is held in another country, they tend to have a higher exposure to overseas investments that might not be included by UK pension managers.
These alternative investments can provide greater diversification to your pension holdings, offering a greater chance for investment returns.
As a result, you may receive a higher pension income, depending on the performance of these investments.
However, please bear in mind that these returns are not guaranteed, and you may end up with less than you invested.
Avoiding the UK Lifetime Allowance
The Lifetime Allowance is the maximum amount you can save into a UK pension without incurring a tax charge. As of the 2021/22 tax year, this threshold is £1,073,100, where it will be frozen until 2026.
If you exceed the Lifetime Allowance in the UK, you’ll be subject to a tax charge when you come to draw your pension. Taking a lump sum would see you pay a 55% tax charge. Taking pension income from your pot would incur a 25% tax charge.
As QROPSs are held in other countries, they are subject to different tax rules. This means you aren’t restricted by the Lifetime Allowance, allowing you to build a bigger retirement pot without having to worry about these tax charges.
Bear in mind that if you transfer a pension pot to a QROPS that’s already exceeded the Lifetime Allowance, you will have to pay a tax charge.
Less currency risk
If you’re living abroad, a pension transfer into a QROPS can help to reduce the impact of fluctuations in currency exchanges rates.
This is because the scheme can pay out in the currency of your new country of residence, rather than in British sterling as a UK pension scheme would.
As a result, using a QROPS while in another country can ensure more stability to your income.
Avoiding UK Inheritance Tax
As overseas pension schemes fall outside of UK tax regulations, this means they are generally free from UK Inheritance Tax (IHT).
Typically, UK pensions fall outside the value of your estate anyway, and so are also typically free from IHT. But there may be circumstances where you have to pay a tax bill.
Meanwhile, transferring your pension savings to a QROPS entirely eliminates the possibility of having to pay UK IHT.
Bear in mind that your beneficiaries may have to pay IHT in your country of residence depending on your circumstances.
Downsides of transferring to a QROPS
While there are benefits to using a QROPS, there are also disadvantages too.
Potential tax charges
While transferring to a QROPS can help you avoid UK Income Tax, there may be other tax charges associated with moving your pension fund abroad.
QROPS in the EEA or Gibraltar
For example, if you want to transfer to a scheme in the European Economic Area (EEA) or Gibraltar and you aren’t resident in these areas or the UK, you’ll pay a 25% tax charge.
You’ll face the same 25% tax charge if you move away from the UK, EEA, or Gibraltar within five years of transferring, too.
Bear in mind that schemes in Gibraltar are regulated by the Gibraltar Financial Services Commission. This may mean that firms and schemes in Gibraltar are subject to different regulatory criteria than UK pension providers.
QROPS outside the UK, EEA, or Gibraltar
You’ll also face a 25% tax charge if you transfer to a QROPS outside of the UK, EEA, or Gibraltar unless you live in the country where the QROPS is based.
Losing your UK pension benefits
A major downside of choosing a QROPS is that you may lose certain benefits that come with your UK pension scheme.
For example, your current pension arrangement in the UK might have guaranteed retirement or death benefits. But, by transferring your pension to an international pension scheme like a QROPS, you will likely lose these benefits.
This is often more of an issue for defined benefit or “final salary” pensions than it tends to be for defined contribution or “money purchase” schemes.
Make sure you can afford to give up these benefits before you transfer your pot.
Higher administration costs
Some QROPSs can be associated with higher costs compared to UK schemes. As a result, you may see more of your retirement savings spent on costs and fees than you might if you left your savings with your UK provider.
QROPS rules and criteria
You must meet the following criteria to be able to use a QROPS:
- You intend to, or currently, live outside of the UK.
- You have a UK pension (excluding the State Pension) of any value.
- You don’t intend to return to the UK for a minimum of five years.
- You have not already purchased an annuity.
- You don’t have a final salary scheme that you’re drawing money from.
Alternatives to QROPSs
There are alternatives if you don’t meet the qualifying QROPS criteria for whatever reason.
For example, a common alternative for retirement savers looking to gain more control over their retirement funds is a self-invested personal pension (SIPP).
Most major investment and pension providers offer a SIPP where you can choose your own investments.
However, bear in mind that SIPPs may not benefit from the same tax advantages as QROPSs. Check with a financial advisor before opening a SIPP if you live or intend to move abroad.
Should you transfer to a QROPS?
All in all, deciding whether to transfer your private pension overseas comes down to your personal circumstances.
For retirement savers who want to be able to move abroad while staying in control of their pension pots, a QROPS can be a good way to access your retirement savings in a tax-efficient manner.
However, you should make sure that you’ve considered all the downsides and that a transfer fits in with your long-term goals.
Finding a QROPS for expats
You can use the government’s website to check whether a pension scheme that you’re considering is an HMRC-certified QROPS.
Alternatively, you may benefit from seeking professional financial advice from a specialist expat financial advisor or planner.
It is often sensible to work with an expat advisor like me, as I will be able to tell you whether a QROPS is the right decision for you based on your personal circumstances.
I can also provide full pension planning services that take your retirement objectives into account.
Need expat pension advice?
For FREE, no obligation pension and financial advice, contact me, Dan Ward to see if I can help.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
Dan is an experienced Senior Financial Consultant at W1 Investment Group with over 18 years experience. He helps international and expatriate clients make tax-efficient savings and investments in Europe and worldwide.