Although retiring and living off pensions is the lifelong dream of many, paying the required taxes often puts a damper on what should be the Golden Years. Learn how QROPS can provide you with a legal way to have a healthy retirement without having to pay high taxes.
What is QROPS?
Recognized by the Her Majesty’s Revenue and Customs (HMRC), QROPS, also known as Qualifying Recognized Overseas Pension Scheme is a pension scheme that was developed in 2006 to provide UK pensioners with more flexibility, fewer restrictions and lower tax liabilities. QROPS allows individuals to transfer their existing or “frozen” UK pension benefits into a different HMRC scheme offshore or outside of the UK. This is particularly useful for Britons who wish to leave the UK and return to their original country of birth to retire or for Britons who are tired of the UK and want to retire elsewhere offshore.
Their UK pension could be transferred from the UK into the country of retirement, however the pension scheme does not have to be established in that same country and sometimes it is better to transfer your UK pension into a third jurisdiction. In order for HMRC to recognize the pension as a QROPS, the plan must meet specific guidelines. The only real stipulations regarding transfer are that annuities cannot have already been purchased and the pension cannot have already started if the pension is part of a final salary scheme.
At the moment there are near 3000 schemes available in 45 countries around the World. Her Majesty’s Revenue and Customs (HMRC) release an updated summary of providers and which QROPS trustees meet QROPS guidelines. Just the schemes within that list are considered to be QROPS. Here is the full list of all the approved QROPS
Who is Eligible for QROPS?
Fortunately for UK pensioners, the majority of UK pensions meet the guideline requirements to be transferred into a QROPS. However, there are still requirements that must be met for the individual to be eligible to participate in a QROPS. Also, the trustees which hold the pension must also satisfy the QROPS requirements and this process has now been streamlined by the Inland Revenue (HMRC). Individuals who qualify for a QROPS transfer must meet the following eligibility requirements.
• The individual must have been either a temporary or permanent resident of the United Kingdom.
• The individual must be between the ages of 18 and 75.
• If not a UK resident, the individual must have held a UK pension scheme at some point or hold a pension in the EU which qualifies for a pension transfer to a Qualifying Recognized Pension Scheme (QROPS)
• State or government pensions CANNOT be transferred.
Individuals who have worked, for any length of time, in either the UK or any of the member states of the European Union (EU) may qualify for a QROPS transfer. Although citizens of many nations qualify for QROPS transfer, US citizens cannot transfer their 401k or Roth IRA into a QROPS as the IRS will not allow a transfer. Similarly, for British expats going to live or retire in the USA, they cannot transfer their UK pensions to a Roth IRA or 401k, but they can transfer to a QROPS in Malta which has a Double Taxation Agreement with the USA, but these individuals need to seek QROPS Specialists’ advice as there are many stipulations and tax requirements which need to be fulfilled.
Which Countries Can I Transfer a QROPS to?
In order for a QROPS trustee to satisfy QROPS requirements, it must:
• have notified HMRC that the scheme is a recognised overseas pension scheme, and have provided evidence of that if required,
• have informed HMRC of the name of the country or territory in which the scheme is established,
• has provided evidence to HMRC that is fulfills all requirements,
• have undertaken to notify HMRC if the scheme ceases to be a recognised overseas pension scheme, and;
• have undertaken to provide HMRC with certain information on making payments in respect of certain scheme member.
Although individuals may be eligible for a QROPS transfer, it’s advised that they wait until they are either no longer contributing to the pension plan, if they are getting tax relief in the UK, or they have reached their lifetime allowance, which is €1.25 million as of 2014.
Individuals who are not eligible for a QROPS pension transfer may find acceptable alternatives, such as a Self Invested Personal Pension (SIPP) which may better suit their needs. A SIPP still gives them the flexibility to choose where to invest their pension, but falls under UK tax rules and pension rules. Sometimes this can be a better fit for clients.
What is the Benefit of QROPS Transfer?
There are actually many benefits to using a QROPS transfer.
• Tax-free growth. Many QROPS jurisdiction have no tax deductions at source, for example Malta and New Zealand.
• Flexibility to manage one pension in one place as opposed to several pensions in different places
• Choice of investment type
• Pay less tax on pension income
• Gain access to receive a higher pension income
• More income to leave to beneficiaries as often no tax upon death
• Ability to purchase high-return global funds without having to purchase an annuity
• Choice of where to live without having complicated reporting requirements once individual has lived in that country for five years
• Tax-free inheritance
• Simplifies estate planning
• Protection from possible creditors in the future (jurisdiction dependent)
What Do I Need to Know Before the Transfer?
Before you make the transfer, it’s important to make sure that the scheme that you’re transferring to is indeed a QROPS. If under the age of 75, you must make sure that your pension does not exceed the lifetime allowance to ensure there is no lifetime allowance charge to pay. Your scheme administrator can assist you with this and can also assist you with working out any charge that may occur.
Prior to making the transfer, you must provide the UK scheme administrator with some vital information, which includes your name, address where you reside, date of birth and telephone number. If you’re not living in the UK, you must provide your last UK address. You must also provide your current UK pension provider with the country where the QROPS was set up, where it’s regulated and the name and address of the QROPS.
One common misconception is that individuals must transfer their pensions to the country in which they live. In fact, it is often better to transfer their pensions to a third, separate jurisdiction for tax reasons, such as Gibraltar or Malta.
Pensioners can live or retire in countries such as Thailand, Canada, Spain or Bermuda, whilst having their pension transferred to somewhere such as Malta or Gibraltar whilst still having their pension transferred either into a local bank account in Thailand, Canada, Spain or Bermuda or into an offshore account. When the funds are needed, they can be withdrawn from an ATM machine. They can also choose to keep the money in the currency of the country where they’re living or intend to live.
Comparison Between UK Pensions and QROPS
The biggest difference between UK pensions and QROPS lies with the tax liabilities, which is the reason why so many people choose to use QROPS transfers when they are contemplating retirement and leaving the UK. One of the main reasons why pensioners utilize QROPS transfers is to legally avoid paying the high tax rate in the UK. The actual QROPS transfer is tax free. Once the pension has been transferred to a QROPS, the pensioner will no longer have to pay:
• UK income tax
• UK dividends tax on UK funds or shares
• UK capital gains tax
• UK inheritance tax
• Any future UK taxes that the Inland Revenue might think up
With the pension tax relief offered by QROPS, pensioners can draw a higher income. They can also target higher returns if they wish to seek more risk from their pensions or they can be conservative and invest wisely into cash, bonds and other low cost instruments.
Step by Step Guide on How to Transfer
When you’re ready to transfer, it’s important to follow these simple steps to ensure an efficient and timely pension transfer.
1. Contact your pension provider to learn the type of pension you hold, its current value and a list of any charges to transfer out. You can contact QROPS Specialists to get this done for you at no cost.
2. Review your transfer options to determine the costs and benefits of the different jurisdictions and what pension will provide you with the best overall growth or outcome you wish to achieve (this could include income protection, inheritance protection, tax planning or currency protection). If your pension scheme is a final salary pension, ask for a valuation via a Transfer Value Analysis System (TVAS) or other method, so you’ll know what growth is needed to improve your pension situation.
3. Complete the transfer paperwork, which includes discharge paperwork from your current scheme, an application for the new QROPS scheme as well as any HMRC required paperwork or documentation.
4. Once your pension has been transferred, you need to determine how you want to invest your pension monies and in which currency. You will likely have a lot more control over the frequency of your withdrawals, the amount you wish to withdraw and if you want an initial cash payment, you can get access to a larger amount.