If you live abroad or intend to move abroad when you retire, you need to understand how you can use your UK pension fund in retirement through a ROPS (recognised overseas pension scheme) or QROPS (Qualifying Recognised 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 qualifying recognised 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 QROPS?
QROPS stands for “Qualifying Recognised Overseas Pension Scheme” and refers to pension schemes in countries outside the UK that meet certain criteria set by HM Revenue and Customs (HMRC).
The UK 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 for a UK resident living 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 pension transfers to a QROPS can make economic sense.
Easy access to your pension pot
Firstly, a QROPS can give you easier access to your pension fund.
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 a lump sum of up to 30% of your pot tax-free when you reach age 55.
This extra flexibility in accessing your pension funds may allow you to reach your retirement goals with greater ease.
Various tax benefits
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 tax in both the UK and your country of residence, unless the country you live in has a double-taxation agreement with the UK government.
A QROPS would mean you wouldn’t owe this tax in the UK at all, removing double taxation as a possibility.
Greater access to different investments overseas
As a QROPS is held in another country, they tend to have a higher exposure to overseas investments that might not be included by pension managers in the UK.
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 (LTA)
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, pension transfers 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 pension scheme in the UK would.
As a result, using a QROPS while in another country can ensure more stability to your income.
Avoiding UK Inheritance Tax (IHT)
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.
QROPS in the European Economic Area 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, European Economic Area, 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 and pension rules 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.
You also need to make sure that you and your pension are eligible for a QROPS pension. In general, if you’ve built up a private pension in the UK and now live abroad, you will be eligible for a QROPS. Check to make sure you are before you try to move.
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.
Useful information about QROPS
The following information may help you with understanding more about ROPS and QROPS.
QROPS Pension transfer
To be eligible to transfer your UK pension to a QROPS, you must be a UK pension holder, be living or planning to live abroad, and not be planning to return to live in the UK.
In addition, the QROPS must be approved by HM Revenue & Customs (HMRC) in order for the transfer to be tax-free.
The risks and potential drawbacks of transferring a UK pension to a QROPS
There are several risks and potential drawbacks to consider when deciding whether to transfer a UK pension to a QROPS. These include:
- Lack of protection from the UK Financial Services Compensation Scheme (FSCS): QROPS are not regulated by the FSCS, which means that you are not protected if the scheme collapses or the provider goes out of business.
- Potential for poor investment performance: As with any investment, there is a risk that the investments held within your QROPS may perform poorly, which could impact the size of your retirement savings.
- Potential tax charges: If you exceed the Lifetime Allowance (LTA) or transfer a pension pot to a QROPS that has already exceeded the LTA, you may be subject to a tax charge. It is important to understand the tax implications of transferring to a QROPS and to seek financial advice to ensure that you are aware of any potential tax charges that may apply.
The role of QROPS in estate planning and inheritance
QROPS can play a role in estate planning and inheritance by allowing individuals to transfer their UK pension savings to a scheme that is based outside of the UK and therefore not subject to UK Inheritance Tax (IHT).
Typically, UK pensions fall outside the value of an individual’s estate and are therefore not subject to IHT. However, there may be circumstances where an individual is required to pay IHT on their pension.
Transferring to a QROPS can eliminate the possibility of having to pay IHT on a UK pension, as QROPS are generally free from UK tax regulations.
It is important to be aware of the potential impact of transferring to a QROPS on your estate and to seek financial advice to help you make an informed decision.
The potential impact of Brexit on QROPS for UK citizens living in the European Union (EU) or European Economic Area (EEA)
The potential impact of Brexit on QROPS for UK citizens living in the European Union (EU) or European Economic Area (EEA) is currently uncertain.
Prior to the UK’s withdrawal from the EU, QROPS were available to UK citizens living in EU or EEA countries and were subject to the same tax rules as UK pensions.
However, the UK’s withdrawal from the EU may affect the tax treatment of QROPS for UK citizens living in EU or EEA countries.
It is important to keep abreast of developments in this area and to seek financial advice if you are a UK citizen living in an EU or EEA country and are considering transferring to a QROPS.
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.
What are the benefits of a QROPS?
Can a UK resident have a QROPS?
In general, a UK resident is not eligible for a QROPS for their retirement income. This is because some overseas pension schemes may include investments that are not permitted in the UK. There is also little to no benefit in a UK resident using a QROPS.
There are circumstances when a UK resident can hold a QROPS, such as if they live abroad and then return to the UK. However, there may be penalties if you access QROPS funds while living in the UK.
What is the difference between a SIPP and a QROPS?
The main difference between a SIPP and a QROPS is that you can choose your own investments when using a SIPP, while you may not be able to do this in a QROPS.
However, most SIPPs that you might use will be UK-based. As a result, if you live outside of the UK, a SIPP may not be as useful to you as a QROPS.