QROPS - Qualifying Recognised Overseas Pension

As an expatriate living abroad, an offshore pension scheme could make a lot more sense to you than a UK pension.

In April 2006, it was announced that individuals with UK pension rights, who have (or will) become non-resident in the UK for tax purposes, could transfer  their pension benefits out of the UK to a QROPS, Qualifying Recognised Overseas Pension Scheme with the Revenue's approval.

A QROPS is an overseas pension wrapper that defines the rules that apply to the scheme and the way that the assets are held, administered and used to provide benefits.  

For a period your transferred pension may be constrained by both the pension legislation governing the QROPS and UK pension legislation. However, once you have been non-resident in the UK for 5 complete tax years you can enjoy a number of benefits, including:

Lifetime Limit Planning

UK  - The lifetime Limit provides a ceiling on the amount of tax relieved savings a person can build up in a registered pension scheme. There is a single lifetime allowance against which an individual’s pension savings will be tested on certain events such as when they take their benefits.  

The allowance will rise to £1.8m by 2010 and will be reviewed periodically thereafter. A Lifetime Allowance charge of 25 per cent will be made on pension funds in excess of the Lifetime Allowance where the excess is taken as a pension, and 55 per cent where the excess is taken as a lump sum. This charge is designed to remove the tax advantages given on pension savings in excess of the lifetime allowance limit. 

QROPS  - At the point of transferring your UK Pension into a QROPS there is a valuation carried out to determine how much of the "Lifetime Limit" has been used by the existing fund. A QROPS is NOT part of the lifetime limit, so once the transfer value has been taken into account.... ALL the growth will be allowed in ADDITION to the prevailing limit.  

Wider Investment Powers

UK  –  Pension funds have a wide investment remit that would be broad enough for most investor’s needs. It used to be straightforward before the pensions regulations changed in April 2006. Investments were either on or off the permitted investment list. This list doesn't exist anymore; however, some investments have been blacklisted such as: personal loans, residential property, fine wine and art. 

QROPS   - The assets an individual can invest in through a QROPS is broader than the UK and includes loans, residential property, fine wine and art. 

A business owner could have non-taxable access to the trust’s funds through loans on commercial terms.  Any interest paid on the loan to the Trust will ultimately be for the benefit of eligible members of the unapproved pension scheme, including the business owner.  

Taking Benefits

UK  - With a Personal Pension, Stakeholder plans, SIPPs & AVCs you (and sometimes your employer) contribute to your retirement fund. The contributions made; together with investment returns, will determine how large your fund becomes.  

You cannot convert your pension savings before you are 50 (going up to 55 April 2010). At this time you can take up to a quarter of your pension fund in cash, as a tax-free lump sum. The remaining fund must be used to provide you with an income, which is taxable.  

You can decide when to convert your fund to income you don’t have to stop working to do this. However, you must have converted your fund by your 75th birthday. 

QROPS  - In order for an offshore pension to enjoy QROPS status, the rules governing the taking of benefit must be very similar to the UK rules. The most significant difference for our preferred QROPS provider however is that the income can be generated by the fund after age 75 and therefore the member need not buy an annuity. This can increase death benefits.

Death Benefits

UK  - Death benefits will vary depending on how you are taking benefits, annuity, phased or unsecured. Please see our document describing your options at retirement. In summary however you must invest your pension fund into an annuity before the age of 75 years, or face up to an 82% tax penalty on the value of your pension fund.   

QROPS  - Some QROPS regimes offer a special form of "Annuity", where taking income is flexible (and it can be deferred). This means the rates of tax can be very low and funds are not lost on death.  

In essence - with an onshore pension that has to be invested in an annuity, your pension effectively dies with you – however, a QROPS benefits can be willed to an individual’s heirs as part of their overall estate.  

Where Will You Retire?

In conclusion, the plans may be suitable for those who are planning on living, working and/or retiring abroad, and they can be very tax effective and flexible.   

However, QROPS are more expensive than a UK pension, and if there is any possibility that you will want to return to the UK you will not achieve anything by transferring your pension to a QROPS, as your return to the UK will bring your pension back within UK legislation. 

Transferring your pension to a QROPS can move your fund to an environment that increases the investment possibilities and death benefits (after age 75).

However, the resulting income or capital gain is sure to be taxed when it is remitted to your new country of residence, and for many jurisdictions, even if it isn't. So, one also needs to think carefully and long-term about the tax regime you may retire to, as this will have a direct bearing on the tax efficiency of the final retirement income benefits.   

Ideally when your pension is converted into income, you will have already moved into low-tax residence.