QROPS is an overseas pension scheme that meets Her Majesty’s Revenue and Customs (HMRC) requirements. QROPS have existed since the 6th April 2006 when the UK brought in pension legislation in response to an EU requirement on the freedom of capital movement. The goal was to help simplify pension planning for those living overseas with UK pensions.
It is a tax-free wrapper that allows you to hold and invest pension assets for retirement or beyond. QROPS operate beyond UK tax laws and so protect investors from possible future changes in UK pension regulation. QROPS can be beneficial, depending on your situation. In terms of investments, a QROP can hold in the same regular assets as your UK pension.
You can achieve this by requesting, completing and submitting a ‘transfer-out pack’ to your existing pension provider. QROPS are highly regulated, so your current pension provider will require several additional forms to satisfy their compliance processes. Completing a QROPS transfer is rather simple from the client’s side. The following article from the Financial Times (2019) outlines some of the background we look after and complete for our clients.
You should consider using QROP if you are resident in EEA and intend to remain for the next five years. Also, if you have a UK pension or SIPP pot that is approaching or has surpassed your lifetime allowance (LTA). It currently stands at £1.055m (2019/20). There are, of course, other factors to consider, but the above is a basic premise. If you do not match the above criteria, then consolidation of your pensions into a SIPP is likely the more suitable advice.
In the UK, every resident has a lifetime allowance of £1,055,000 (HMRC, 2019). Any pension savings exceeding the lifetime allowance will endure taxes at 25% or 55% depending on how you access the capital. Avoiding this hefty tax bill is arguably the most significant advantage of QROPS. For investors resident in the EEA with pension savings close to or breaching £1,055,000, a QROP transfer would like to save them a considerable amount of tax in the future.
QROPS are in line with UK pension freedom rules which were introduced on 6th April 2015, permitting people to access their pension savings from Age 55. Why would the UK government allow this? In reality, George Osbourne, the former Chancellor, introduced pension freedom rules as a means of gathering more stealth tax. That point aside, many UK workplace pensions do not permit people to access their pension savings until Age 60 or 65. Therefore, QROPS offer greater flexibility than UK workplace pensions.
In the event of your death, a UK pension such as a Final Salary or Defined Benefit scheme will only pay your spouse a pension of up to 50% of your annual pension. If your spouse passes away this 50% payment stops. The remainder of your pension pot goes back into the company pension coffers. QROPS allows you to nominate any number of beneficiaries, including spouses, children, family or friends. In the event of your death, 100% of your pension value passes onto your named beneficiaries. If they were to pass away one year later, 100% of the amount would then move onto their heirs. So your pension pot lives on within your family.
The UK pension legislation does not govern QROPS. So QROP transfers protect investors against any future changes in UK pension legislation. However, QROP holders in the EEA must note that they would fall back into UK legislation and taxation if they moved to another unapproved QROP scheme. Additionally, if they moved beyond the EEA within five years of the transfer they would be subject to an Overseas Transfer Charge (OTC) since 2017.
QROPS provide investors with greater freedom over how they wish to invest their portfolio in comparison to UK pensions. However, a more excellent choice does not automatically mean better performance. For some investors, this can help to reduce overexposure to UK assets.
Your UK pension provider will only transfer a GBP value into your QROP. Inside your QROP though, you have the freedom to move your pension into one or more currencies. Some expats prefer to match their pension to the currency of their retirement country. It helps to avoid currency fluctuations and be sure of the EUR or USD amount they will receive each year from their pot.
Capital gains tax does not apply to the growth of your QROP. So, like your UK company pension, final salary pension, or defined contribution pension you will not face taxes on any growth. In some instances, QROPS permits a 30% tax-free lump sum as opposed to a 25% maximum in the UK. On a pot of £1m for example, this creates an additional tax-free income of £50,000
If your country of residence holds a Double Taxation Agreement (DTA) with your QROP jurisdiction (typically Malta), your QROP provider can pay you gross income from your QROP. You are then free to pay your local taxes in your country of tax residency. Extensive DTA’s is why Malta is one of the longest standing and well regarded QROP jurisdictions. Along with its EEA status, which means no OTC 25% tax is applied to any transfer so long as the client is also resident in the EEA.
From Age 55, you can decide when and how much you wish to withdraw from your QROP. There are no obligations to purchase an annuity. Some investors prefer to take a higher income during their early retirement years to enjoy their more active years. Others prefer to take their 25% tax-free PCLS and take the remainder gradually. You are free to decide withdrawals at any point.
QROPS are one of the most underutilised financial planning tools available in the UK. Mainly because UK Advisers typically have little or no knowledge of QROPS. However, as the UK is at the time of writing an EEA member country, there is a small pocket of well informed UK residents utilising QROPS. It has been utilised in the City of London where banking pension pots often breach the £1.055m LTA mark. This topic is an entire article in itself.
Most people refer to Final Salary or Defined Benefit (DB) schemes as being gold plated. They have great value. That is true in many instances. A client could be worse off by transferring their Final Salary pension to a QROP. However, a growing number of Final Salary schemes are reaching a tipping point. As recently highlighted by some high profile collapses, including Sir Phillip Green and BHS (Financial Times, 2019). It is prudent for clients to understand the strength of their DB pensions as this may affect their ability to complete pension payments in years to come.
QROPS were introduced to create an even playing field for non-UK residents with UK pensions. However, HMRC believed some were primarily using QROPS to avoid UK tax and access their pensions early. On the 9th March 2017, a 25% Overseas Transfer Charge (OTC) was declared on any transfers where the client or the QROP is outside of the EEA. There are some negligible exceptions to this. Many suggest this 25% tax will also apply to transfers in the EEA after Brexit. As such, a small window of opportunity may exist for EEA residents who could benefit from QROPS.
A broader investment choice is not a bad thing. However, we have seen instances where Financial Adviser’s have placed a QROP client in high-risk structured note beyond their level of understanding. UK pensions or SIPPs do not allow to clients invest in such assets. It is vital to ensure your QROP portfolio is in line with your attitude to risk and return. Never be afraid to directly ask your Adviser if they are receiving any form of inducement or commission to place you in a particular asset or fund. Better more, ask for this in writing. Adviser commission is a key driving factor in bad financial advice.
QROPS provide clients with unlimited access from Age 55 and greater control over their retirement. However, there is an obvious danger here that clients could exhaust their pension savings too early. Technically, there is nothing to stop a client withdrawing all of their QROP on their 55th birthday. While we would typically advise against this, there would be nothing the QROP provider, or we could do to stop them.
Just because a scheme currently qualifies as a QROP provides no guarantee that it will continue to do so moving forward. QROP providers must re-notify HMRC every 5-years that they are continuing to be a QROP. Any reputable QROP provider is not going to forget to complete its most important piece of admin every 5-years, but it highlights a point. That is why we only use QROP providers with a reputation and relationship with the HMRC.
Statements such as ‘all QROPS are bad’ or in the more distant past ‘all QROPS are good’ are misleading and unfounded. A QROPS can be an excellent and highly valuable financial planning tool. At the same time, it could be used with terrible effect causing serious damage to a clients pension and family wealth. For example, a client living in France with a £1.5m UK pension could be advised a QROP and invested in a well-diversified portfolio. Creating huge tax savings and excellent returns. In contrast, a client in Dubai with a £1.5m UK pension could be advised a QROP and invested in an undiversified and high-risk portfolio. Creating a tax bill of £375,000 on transfer and terrible returns
My expat neighbour told me QROPS are a scam. My expat colleague told me QROPS are a scam and he lost all his money. My UK IFA told me QROPS are a scam and only sold by unscrupulous offshore Advisers on high commission. We can confirm that none of the above statements is true. They are indeed things we have heard clients say before though. As outlined in the above “Are QROPS Good” they can be used to great or terrible effect. This is dependent on your own situation. That is why taking qualified advice from an experienced Adviser is essential. You should not proceed with a QROP transfer if you have any doubt about your Advisers integrity.
QROPS transfer increases the complexity of paperwork that the Adviser & Client need to submit and the amount of admin the UK pension team needs to complete. That is because the UK pension provider has additional checks to complete. Additionally, QROPS providers cannot utilise the Origo Transfer System which negates the requirement for physical transfer out forms. The quality of Adviser paperwork is essential in minimising QROP transfer times. That is why we pre-complete all application forms and documents for clients to sign. It saves our clients time and reduces errors.
QROPS are not a low-cost solution. They are a more expensive financial planning tool than a SIPP. For example, on a £250k transfer, a QROP provider can charge a set fee of £645 with an annual fee of £895. The 10-year cost equals £9,595. On a £250k transfer, an International SIPP provider can charge a set fee of £0 with an annual fee of £180. The 10-year cost equals £1,800. A QROP is £7,795 more expensive over 10-years. All prices exclude for VAT.
So why would anyone choose a QROP? Say an EEA resident client had a £1.1m UK pension pot with Lifetime Allowance of £1.055m. That means any growth in the pension would attract an LTA charge of 25%. If we assume a net annual growth rate of 5% pa, the client’s portfolio of £1.1m will grow by £55,000 per annum. In year one this would create an LTA tax of £13,750. Compounded over 10-years, this would generate an LTA tax charge to HMRC of £163,182.78 as highlighted on the right.
Like any UK pension, there is no tax on the growth QROP. However, a tax applies to the income of the QROP. That is the same for every UK pension. As such, when you take withdrawals or pension income from your QROP, you must declare this income on your tax return in your country of residence. If Double Taxation Agreement (DTA) is in place between your QROP jurisdiction and country of residence, then your QROP provider might pass this income to you gross. Currently, Malta has 71 DTA’s in place, which includes the typical Expat retirement locations. It makes Malta one of the most influential QROP jurisdictions for most clients.
After their inception in 2006, QROPS was the buzzword in expat financial planning. Expats globally were advised by their IFA to transfer their UK pension to a QROP. There was a rule of thumb that if you were outside the UK and not intending to go back, then QROP was the answer.
For many clients, this would have been useful advice. However, for others, this would have been unsuitable. This solution increased costs of a QROP did not outweigh the benefits of utilising an International SIPP as they are in no danger of exceeding their LTA. Many QROP clients could significantly reduce their costs by transferring their QROP back to an International SIPP.
With annual QROP fees of up to £2,500 and annual international SIPP fees as low as £180, a client could reduce their annual trustees costs by over 10 times.
With annual QROP fees of up to £2,500 and annual International SIPP fees as low as £180, a client could reduce their annual trustee costs by over ten times, which would result in a 92.8% saving. These savings would add £23,200 to the value of their pension pot over the course of 10 years.
Furthermore, all Advisers have heard clients say ‘I am never going back to the UK’. That is true until something changes: your career, your health, your spouse, or just wanting to be closer to your parents or grandchildren. For many, this is the catalyst of researching what to do with their QROP. Our Advisers have helped numerous clients reduce their costs and transition their pension back into a UK scheme.
Clients often ask how they could reduce the costs of their QROP. Many expats have been correctly advised a QROP transfer in the past. QROPS have existed for 13 years, so this may have been some time ago. For one reason or another, you have lost contact with your original Adviser. Perhaps you moved, they moved, or you were unhappy with the service.
The QROP market has higher competition now than before. It is suitable for clients as it has driven down QROP fees. So you may in a QROP which is the correct option, but your annual QROP fees are outdated. With annual QROP fees on a £250k pension being as high as £2,500 and as low as £895, a client could reduce their annual QROP costs by more than half or even 64.2%. They are saving themselves £16,050 over the course of 10 years.
While the possible cost savings are attractive, some clients may also complete a QROP to QROP transfer. That would allow them to choose a QROP jurisdiction such as Malta which is more in line with UK pension freedom rules. This solution would enable them to access their 25% tax-free lump sum from the of 55.
The HMRC QROPS list gets updated on the 1st and 15th of each month. It is a QROPS List of the schemes that have notified HMRC that they fulfil the conditions to hold an overseas pension scheme title.
Importantly though, HMRC cannot guarantee that the schemes on the list are indeed recognised overseas pension schemes and are not liable for any information on the website. That causes some confusion for expats but makes sense. For example, a QROP provider could do something contradictory to HMRC’s QROP requirements, but HMRC could not know this information in live time.
The first thing to do when receiving QROP advice is to search and check if the QROP provider your Adviser is recommending is on the HMRC QROP list 2019. The list is organised in A to Z by the jurisdictions. If you are in uncertainty, ask your Adviser to confirm the location of QROP or get in touch with us.
Each country then lists the providers who have notified HMRC. Search for the name of your QROP provider. In this instance, we searched for Malta. If your proposed QROP provider is on the list, then this is undoubtedly a good start as it proves the company is at least in contact with HMRC.
You will still need to discuss this with your Adviser. Along with asking them to confirm that your QROP is in line with HMRC’s requirements and that is is a recognised overseas pension scheme. If you are unsure, you can Contact Us.
We provide our clients with financial advice. Ie. Which QROP provider is most suited to their requirements. The QROP provider replaces their UK pension provider such as Aegon, Scottish Widows or Mercer. That QROP provider will appear on the QROP list. We then advise our clients on all portfolio matters and instruct the QROP provider to take actions such as making withdrawals once the client has signed the paperwork.
So when we say simple, we mean in relative terms. The transfer process is bureaucratic and slow, but from experience, our Advisers and Admin know the process and how to navigate it effectively. However, receiving the correct advice on your transfer is more complicated. It is an important decision and what that could be very beneficial to your finances so you must do your homework on your Adviser.
Completing withdrawals is simple. You are free to withdraw as much or as little of your QROP as you wish from your 55th birthday. While we would advise ensuring your portfolio last for your retirement years, the choice is yours. We will pre-complete all forms for you with instructions for signing and returning. As due diligence, you will also need to prove that the bank account you have nominated is indeed your bank account. The bank account location can be anywhere in the world.
An International SIPP is the same as a QROP in the respect that it is a tax-free environment for non-UK residents to consolidate their UK pensions. It provides clients with more flexibility and control over their UK pensions.
If you are resident outside of the EEA, then an International SIPP would almost certainly be the preferable transfer solution for you instead of a QROP. Moreover, if your pension pot is not approaching or exceeding your lifetime allowance limit (£1.055m in 2019/20), International SIPP would likely be more suitable for you.
If you are an EEA resident with a pension pot approaching or exceeding your LTA limit but planning to move beyond the EEA within 5-years, then an International SIPP would again be more suitable. International SIPPs have lower set-up and annual costs than a QROP. On a typical example of a £250k UK pension, an International SIPP would be £7,795 cheaper for you than a QROP solution over ten years. You should only utilise a QROP if the benefits outweigh the costs. If you think a SIPP is more suitable for your needs learn more on your International SIPP page.
In summary, the entirety of your QROP pension value passes onto your named beneficiaries as one lump sum instead of a 50% pa spouse pension. For example, if your Final Salary pension of £250k offers to pay you a retirement income of £10,000 pa, in the event of your death the scheme will pay your spouse £5,000 pa. When your spouse passes away, the £5,000 pa will stop. The remainder of your pension will go back into the employer pot. If you have no spouse, the 50% pension will not be payable to anyone.
If your QROP is worth £250k, in the event of your death, the £250k will be paid in full in one lump sum to your spouse or named beneficiaries. That is often preferable than waiting for annual payments. Your spouse or beneficiaries can then also pass this wealth onto their beneficiaries or possibly your children. This helps protect family wealth over generations.
Several factors could make a QROPS transfer suitable for you. There are two vital considerations. Firstly, if you are an EEA resident and your pension pot is approaching (£700k plus) or has exceeded your lifetime allowance (£1.055m 2019/20). Secondly, if you have no intention of moving away from the EEA over the course of the next five years and will remain an EEA resident.
Good quality QROP advice is essential if you are considering a transfer. Even if you decide against a QROP transfer, it will have been a valuable exercise understanding why it is not suitable for you.
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