Qualifying Recognised Overseas Pension Schemes (QROPS)You will have seen in recent months mention of QROPS and the potential attraction to non-UK residents.
What are they?QROPS were introduced in April 2006 as a means to allow individuals with UK pension funds to transfer their pension funds abroad.
Any scheme can register to become a QROPS – the main criteria is that it must be regulated as a pension scheme in the country where it is based.
When the schemes register, they agree to tell the UK Revenue of any payments out of the plan. If these exceed UK limits (so if a lump sum is greater than 25%, or if income exceeds the maximum via drawdown), or if the payment is before the member could have had benefits (i.e. age 50/55), or there is a subsequent transfer to a non-QROPS scheme, there is a tax to the member of between 40-55%.
The rules state that if the member has not been a UK resident for either the current or any of the previous 5 UK tax years, then they will not be liable to this tax.
HMRC publishes a list twice a month of the schemes (although permission must be given by the scheme to be included on the list, so not all may appear).
In recent months there has been an expansion of the schemes based in ‘offshore’ jurisdictions like Guernsey and Isle of Man, (although there are a lot of ‘onshore’ schemes as well, which could be more suitable for individuals moving overseas).
In Spain there are several personal pensions which have registered to be QROPS, and therefore transferring your pension fund to a Spanish pension plan is now possible. However Spanish legislation is similar to UK legislation, and therefore offers few benefits.
Offshore QROPS offer the ability for the pension fund to be denominated in a variety of currencies, and allows for greater flexibility for the fund in the event of death. For example, under income drawdown in the UK, on death the fund can be passed to a surviving spouse, or to children less 35% tax (after age 75 the taxes increase to 82%), but from a QROPS, providing that you have been a non-UK resident for 6 years, then the fund can be passed tax-free on death.
In light of recent changes by HMRC, most schemes will limit the income available to broadly in line with UK limits. Any schemes that allow access to the fund (such as withdrawing excessive income or withdrawing the whole fund) run the risk of being deregistered from the QROPS list, and potentially incurring charges of up to 55% on the member.
This has been expanded further as HMRC last year slightly amended their QROPS rules - if an individual transfers to an overseas scheme which has registered to be a QROPS, but is found subsequently to have been ineligible for QROPS status, then there will be charges to the individual of up to 55%.
One key area that is often omitted by advisers is that a QROPS is similar to an Income Drawdown plan in the UK, in that income is not secure, and based on the investment performance of the fund. Unlike in the UK though, where an income drawdown contract can be converted to an annuity should a guaranteed income be required, through a QROPS it is difficult to purchase an annuity.
Although a QROPS might be suitable for some people, due care should be taken since advisers may not have the necessary experience or qualifications to advise on UK pensions and are unlikely to be regulated (and therefore you may have no recourse should the advice be wrong), and by moving from a UK scheme you may lose guaranteed benefits that cannot be replaced.
The majority of QROPS schemes at the moment also have high charges and high exit penalties (typically around £2,000 p.a.), in addition to the investment fund charges, and this level of charges can quickly erode even large pension funds.
SummaryQROPS undoubtedly offer much greater scope for individuals than previously – but they may not be suitable for everybody, and correct advice is important to ensure that the individual is aware of the risks associated, and that whatever QROPS is recommended that these are suitable for the home country for the member.
With more and more UK residents looking to emigrate, correct advice and planning is needed to ensure that any risks to the member are minimised in the future.
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