First published in the Gibraltar Magazine September 2008
Anyone reading the international expatriate press in recent months may will have come across a curious 5 letter acronym – QROPS. What is it and why should it be considered by anyone who has left the UK for foreign climes? This article attempts to explain QROPS and perhaps along the way may debunk some of the myths and misleading information that has been published.
On moving abroad many British expatriates will have left their UK pension rights retained in their existing arrangements. These private pensions remain subject to UK pensions law with the effective requirement to purchase an annuity at a later stage (and in any case no later than attaining 75 years of age without the later prospect of huge tax charges otherwise). Additionally UK taxation may be suffered on pension payments. Annuity rates are at historic lows and of course this has been exacerbated this year following the turmoil experienced in the international stock markets, reducing the investment performance of underlying funds. The second negative aspect of annuities of course is that in the event of the death of the pensionholder, any remaining value in the pension fund is lost for all time.
Under UK legislation introduced in 2004, effective from April 2006, expatriates or UK residents who have a demonstrable intention to move overseas may transfer the value of their UK pension rights to a non-UK pension scheme. In doing this, it is possible to avoid most of the normal restrictions imposed on the pension fund if it remained in the UK. The transfer must be made to a Qualifying Recognised Overseas Pension Scheme (QROPS for short) that is approved by HM Revenue & Customs (HMRC).
Such non-UK schemes may be established in many jurisdictions across the world. Amongst others, Gibraltar, Guernsey and Isle of Man are all considered suitable and of course as British territories, clients may rest assured that their affairs are being well looked after in any of these well regulated jurisdictions.
There are a number of basic conditions that must be fulfilled in order for a transfer to a non-UK pension scheme to be considered advisable. Cases should be examined on an individual basis but the basic rules are:
The pension holder must become non-resident of the UK and remain so for at least five complete UK tax years.
The existing UK pension scheme can be in drawdown (i.e. benefit is being paid from the fund directly – an approach now referred to as "unsecured income") before transferring to a QROPS. However, there are restrictions and if the permitted lump sum (nearly always 25% of the value of the pension rights) has been taken, no further lump sums are allowed.
UK rules impose a statutory lifetime allowance relating to the amount payable from UK registered pension schemes that will be treated as tax-privileged. For the tax year 2008/9 this allowance is £1.65m and will rise in stages to £1.8m by 2010/11. Transferring benefits to a QROPS is known as a crystallization event and the value of pension rights transferred in excess of the lifetime allowance will be taxed at the rate of 25%.
QROPS can be established so that the underlying investments are not subject to tax. With careful on-going planning, the pension fund can be continued until retirement date on a tax free basis. As
mentioned above, the other principal benefit in transferring a UK Pension to QROPS is that the UK requirement to purchase an annuity in later life is avoided. The pension fund can therefore be used by the member for his lifetime and any remaining balance can be passed on to their heirs upon the member's death.
In order for the pension to qualify for QROPS status, the overseas plan must be regulated in its home territory and HMRC will require confirmation that this is so before recognising the plan.
Individuals who are seeking advice when considering in their own pension arrangements have literally dozens of options available to them. As always in financial services, not all QROPS are the same and the advice received may also vary, so here are some general comments on what to look for when taking advice?
First of all, check that the non-UK pension option you are considering is indeed recognised as a QROPS by the UK revenue authorities. Although it is not obligatory, recognised schemes may choose the option as to whether that particular scheme is listed on HMRC's own website. This is a good place to start for obviously to be a QROPS in the first place, HMRC will have subjected the international scheme to a rigorous background check.
Secondly, check whether the advisers you are considering using are actively promoting in-house investment funds for the underlying pension, or will you be allowed the freedom to elect your own
investment adviser. As long as the adviser is regulated and you are happy with the performance and fees, this may not be a critical issue for you. But it becomes important when comparing fees as some plans may charge less for the QROPS itself but force you to invest in a restricted list of funds - caveat emptor (let the buyer beware) indeed.
I believe that it is also important that when transferring to a QROPS, the fact this this is a pension designed to provide retirement income should be considered paramount. Whilst not perhaps against the UK rules as they are currently written, the UK revenue authorities take a dim view of "cashing in" – that is using the transfer to a QROPS simply as a way of encashing the pension proceeds and using the released cash for current expenditure – e.g. perhaps to buy a yacht. This was not the intention when the UK government legislated for such transfers to non-UK schemes and it is possible that in the future this will be formally forbidden. The advantages of transferring to a non-UK scheme have been set out elsewhere in this article but using this option to immediately close the pension should not be considered. As always, professional advice at the outset should be obtained to determine individual options that will depend on current residency, family circumstances, state of health etc.
Be realistic on timing. Once the relevant information has been obtained from the current UK pension holder, the administrators of the international plan will normally require a 6-12 week period to complete the transfer to the new arrangement. This timescale will depend on the existing UK pension provider and your new pension administrator will normally be responsible for liaising with that provider at all times and any necessary costs should be agreed with the individual member in advance.
An independent pension review is normally recommended taking account of an individual's own own circumstances before transferring their UK pension rights to a QROPS. However this is not a legal requirement and can be waived by the member although care should be taken at all times if this is being considered.
Finally, it should be noted that a subsequent withdrawal from a QROPS is normally allowed but questions of how this can be arranged and any likely withdrawal costs should also be determined at the outset. Once again this will depend on individual circumstances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.