Planning for expat retirement can feel daunting, particularly when it comes to managing your money. After many years of hard work, it is important to protect your finances and ensure you achieve the retirement you’ve always wanted. For some, this means remaining with a current UK pension provider, which can provide security and ease of access should you move back to the UK. However, this isn’t the right choice for everyone, and expats are increasingly turning towards the alternative but ever-popular QROPS to help manage their retirement funds.
We’ve taken a closer look at QROPS, exploring their pros and cons to help you decide whether they might be the right choice for you as you approach or re-evaluate your retirement.
What is a QROP?
A Qualifying Recognised Overseas Pension Scheme, or QROPS, is an overseas pension scheme that meets a list of requirements that have been set out by HM Revenue and Customs (HMRC). As a result, it is possible to transfer your UK pension from the majority of British private or corporate pension schemes to an expats QROPS without being charged.
In order to qualify as QROPS, an overseas pension scheme must be managed as though it is a UK pension for anyone who has been a resident in the UK in the past five tax years. If this is the case, the pension will simply become subject to UK pension regulations when you return to Britain. However, in cases where you have been a non-resident in the UK for the last five years or more, the expats QROPS is then subject to the laws of the local jurisdiction where it is based. As a result, it is possible for expats to choose a jurisdiction where there is no deduction of tax at the source of the scheme, so you will only pay tax based on the rules in your current country of residence.
Am I eligible for QROPS?
The main criteria that you have to meet in order to be eligible to transfer your pension to a QROPS include:
- You have a UK pension (excluding state pensions) that can be of any value.
- You are planning to, or currently, live abroad.
- You are not planning to return to the UK or you will live outside of the UK for a minimum of 5 years.
- You have not already purchased an annuity.
- If yours is a final salary scheme, then the scheme should not be already in drawdown.
There are many scenarios that would make you eligible for QROPS. Expat retirement overseas is a common reason for moving a pension scheme, as is emigrating abroad after setting up a UK-based pension scheme. Expats QROPS are also set up by those who were born overseas but have spent enough time working in the UK to build up benefits within a UK Pension Scheme before returning home.
Thankfully, QROPS do need to be set up in your current country of residence, so they provide a flexible option for those who are unsure of their future plans. As long as your chosen pension scheme has been approved as a QROPS by HMRC, you are eligible to transfer your pension at your leisure.
The transfer process
Considered a recognised transfer by HMRC, the transfer of a UK pension to a QROPS will not be subject to an unauthorised payments tax charge. Instead, this transfer should be free, quick and easy.
Once you have sent your request to HMRC, they will often be in touch within 30 days to request more details of the transfer and to ask you to sign a declaration. When this is completed, the transferring scheme will be able to undertake its own checks to ensure the receiving scheme is in fact a registered QROPS, and that it is therefore a recognised transfer. In addition, a lifetime allowance test will be completed to ensure none of the transfer is subject to tax based on the UK’s lifetime allowance.
Once the transfer has been completed, HMRC will receive information from the QROPS to confirm the transfer has been made, as well as to confirm details of the individual who has made the transfer to ensure all records are up to date.
The benefits of QROPS
There are two main options for expats when it comes to managing pension schemes: leave the UK but retain your pension with your current UK-based pension provider or transfer your pension scheme to a QROPS. While it may feel simpler to keep your pension in one place, particularly if you are likely to return to the UK within five years, there are many benefits to the latter. These include:
- Tax benefits: Income received from a UK pension scheme will have to be subject to UK income tax at 20%, regardless of whether or not you live in the UK. By transferring to a QROPS, you will only be subject to the tax laws of the country in which the scheme is located, which can be tax free.
- No maximum allowance: The UK has a lifetime allowance in place for each pension, with any pension that exceeds this allowance subject to a 25% tax charge. If you have been a non-resident for more than five years and are therefore eligible for a QROPS, you will not be subject to this lifetime allowance, so you can save for the future without limits.
- Inheritance tax: Although QROPS are subject to local tax rules, they cannot be targeted by UK tax regulations. As a result, by transferring your funds to a QROPS you can protect your beneficiaries from UK inheritance tax and even transfer your pension to named beneficiaries other than your spouse.
- Currency: QROPS allow you to have your pension payments transferred into a different currency, so you can avoid the issue of fluctuating exchange rates.
- Fund access: You will be able to access your QROPS fund at 55, and will also be able to receive an increased lump sum of 30% if you have been out of the UK for more than five years, which is a 5% increase on the lump sum offered by most UK pension schemes.
The cons of QROPS
While expat QROPS can be incredibly advantageous for those in the right circumstances, they can also be unsuitable for others. Some of the main disadvantages of transferring to a QROPS include:
- Loss of benefits: There are UK-based pension schemes that offer guaranteed minimum pensions and cost-of-living adjustments linked to inflation, which are built into the scheme. By transferring to a QROPS, expats can lose these benefits.
- Possible malpractice: Schemes based outside of Europe are often subject to different legislation, which can result in a higher rate of malpractice and hidden taxes.
- Scheme deregistration: While HMRC keeps a list of QROPS schemes, no scheme is guaranteed to keep this status in the future. If your expat retirement plans are centred around the benefits associated with QROPS, consider how you can protect your finances should your scheme be delisted.
Making an informed choice
The ExpatRoute experts work hard to deliver the best possible information to expats. However, before making a decision about how you will manage your retirement or finances, it is important to seek independent financial advice from a qualified advisor.