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UK Pension Transfer Abroad – QROPS / ROPS Rules 2016


Pension Transfer Abroad. Thanks to the new UK pension freedoms, you can now cash in your entire pension thanks to a spectacular U-turn by the government, but you pay UK income tax on your pension and if you cash your pension in, your funds would be subject to UK inheritance tax at up to 40%. A QROPS was introduced for Brits moving abroad and current rules mean that both tax on income and death of a ROPS may be reduced. It also can reduce foreign exchange movements affecting your income in retirement.

A QROPS (Qualifying Recognised Overseas Pension Scheme) was designed to accept UK pension monies for people who have worked in the UK, but want to retire abroad. The freedom of movement of people and capital was part of the EU Schengen agreement signed in 1985, but it wasn’t until April 6th, 2006 that QROPS evolved from their predecessors.

QROPS have taken many forms which has led to confusion amongst both advisers, trustees and UK pension holders. Now, they have changed again and now they are simply known as Recognised Overseas Pension Schemes or ROPS.

A QROPS scheme has proven to be highly beneficial for many UK pension holders with regards to tax efficiency, pension collation, currency management and risk management.

A ROPS is set up to receive the transfer of UK Pension Benefits for the vast majority of privately administered personal or corporate pension schemes.

Stakeholder pension schemes are a type of defined contribution pension scheme which can also be transferred, along with Small Self Administered Pension Schemes (SSAS).

State pension schemes and final salary schemes “in payment” cannot be transferred to a ROPS.

Introduced by the government in 2001 to make pensions cheaper and more accessible, stakeholder pensions can be taken out directly or through an employer. These can be transferred to a ROPS scheme along with DC and DB pension schemes.

Pension Flexibility of QROPS

The Budget 2014 has put specific emphasis on reforms to the UK pension system, allowing for more freedom in access to your pension. So far, only QROPS in Malta (European QROPS) are allowed the same pension freedoms. Local QROPS pension rules determine if part or all of the growth in funds are available as a cash lump sum. Many non-European QROPS must provide a pension income for life from at least 70% of the pension pot transferred.

New ROPS rules in 2016 now mean that a QROPS in Malta can now receive full pension flexibility freedom. However, that doesn’t necessarily mean lower income taxes. You need to explore the Double Taxation Agreements with the country of your residence in retirement.

A Qualifying Recognised Overseas Pension Scheme is an overseas pension scheme that has met the requirements of HMRC and which can receive the transfer of UK pension benefits without penalties for unauthorised payments or facing any scheme sanction charges. Should you ever return to be tax resident in the UK, the QROPS would become subject to UK pension regulations again, but whilst your pension is offshore, you may draw benefits which could reduce the amount of tax you would have paid if it was left in the UK.

Anyone considered to have abused QROPS regulations, for example if someone is judged to have moved to a QROPS simply for aggressive tax avoidance or taken too much tax-free cash lump sum, may be subject to severe tax penalties of 55% of the pension fund for an unauthorized pension transfer on any wealth they still hold in the UK, or on returning to the UK. These tax charges are paid by the member not the trustees if the trustees can prove they acted in “good faith” and were misled by pension members.

Here is the full list of reasons for charges for unauthorised transfers.

What Would Be the Transfer Value of a QROPS?

The amount of the “pension transfer” provided at retirement depends on the size of an employee’s ‘pension pot’ and annuity rates (the yield on 10 year gilts) at the time if a member holds a defined benefit pension.
For defined contribution pension transfers, the transfer value is simply given by the size of the DC pension pot. These typed of DC transfers are covered by HMRC under the term “pension switching”.

What Amount of UK Pension is Worth Moving to a QROPS / ROPS?

If your pension value exceeds £100,000 you may be able to transfer your UK pension to an “offshore portfolio bond”, also known in the industry as an “offshore wrapper” to hold your investments.

Most smaller pensions of £30,000 – £100,000 will need much more consideration on whether to transfer and advisers need to look for very low cost fee ROPS for it to be considered worth moving overseas. In many cases, a UK SIPP may be more desirable, but would depend on each client’s individual tax circumstances and what tax bracket they fell under as well as other circumstances.

What is a PPB or Personal Portfolio Bond?

A PPB is an offshore portfolio bond which is a whole of life insurance policy which can hold your pension investments. There are essentially two parts to a QROPS / ROPS. The first part is the QROPS trustee who administer a pension and the second part involves the custodians who hold your pension monies for investment.

What is the role of a QROPS trustee?

The QROPS company is the pension trustee and essentially, their role is to administer the ROPS trust. They will work out your PCLS (Pension Commencement Lump Sum) and figure out how much your annual pension would be at drawdown in retirement. They are also supposed to vet the investments that you will be investing in.

ROPS Trustees are legal entities that are permitted to manage your pension. Each ROPS trustee must have a licence to operate and be registered with both their local country financial association as well as be registered with HMRC to operate legally.

The ROPS Trustees are responsible for safeguarding the assets and making sure that the pension rules are followed.

A ROPS trustee will review the advice given to the pension member, establish the relevant documentation and
complete the transfer from the UK pension scheme to the ROPS.

The ROPS trustee reports to HMRC on the client’s behalf for the first ten years that a client is based abroad. The reporting period starts from when a UK pension is transferred abroad. During the reporting period, the ROPS scheme providers continue to pay benefits in accordance with the member payment provisions so as not to create an unauthorised payment. Valid distributions can only be made on retirement, incapacity or death.

What Would Be the Pension Income from a QROPS?

The pension income would not be guaranteed income unlike an annuity of a defined benefit pension scheme. The annual pension income would have to be worked out by the pension trustees. Now, that flexible income is allowed in Malta, a client would be allowed to take as much pension as allowed.

However, in other non-EU jurisdictions such as New Zealand and Gibraltar, clients still can only take 30% as a tax-free cash lump sum and the rest provides them with an income for life, but this may change in the next budget.

In Which Countries Can I Transfer a QROPS into?

There used to be more than 3,600 QROP schemes available in around 46 countries, so the choice was vast. But, HMRC have changed the rules many times and now the list has been whittled down to 950 schemes, notably with many Canadian and Australian QROPS now missing. Although, more than 60 pension schemes in Australia are now back on the list, with many using the tag “55 Plus” Superannuation fund to comply with HMRC’s directive that pension members cannot access their pensions before they reach 55 years of age.

You can see the full list here.

Most Popular ROP Schemes in 2016

Guernsey and the Isle of Man still have the most number of schemes as they attracted the most under the original QROPS rules. The original Guernsey QROPS did not tax non-residents and the Isle of Man tried to rewrite the rules in order to also not tax its non-residents. In the end, HMRC said that this was aggressive tax avoidance and said that both residents and non-residents are taxed the same under a QROPS.

Those in the older Guernsey and Isle of Man schemes are free to transfer out, but some schemes may have high exit charges. Also, those under the older Guernsey scheme do not need to pay income tax, so often there is little point of transferring out unless a pension member was seeking to access a higher portion of his pension fund.
New Zealand QROPS have been popular and early on, many NZ pension schemes were closed down before as members flocked to try to “cash in their pensions”. Many of these members got caught with an unauthorised tax charge.

New Zealand is still a major ROPS destination and it is located in a very well regulated industry. Investment options are often more narrow, but that is because the regulation is much tighter, so the local NZ discretionary fund managers may lend more security to a pension than in other jurisdictions which may allow unregulated funds.

Malta is the most popular scheme in Europe and has Double Taxation Agreement with over 60 countries. It is regulated by the MSFA in Malta.

Gibraltar charges only 2.5% income tax and is a popular destination if Malta ROPS won’t work due to the DTA’s and clients want something simple.

But, the new Hong Kong ROPS has many DTA’s and you can perhaps reduce income tax to zero due to the strength of many of the DTA’s, so I expect HK to gain more traction.

But, this could all change again with the budget in 2016. Almost every year, there is a spanner thrown in the works which changes the attraction in each territory.

QROPS History | Pension Transfer Abroad

In April and May, 2012 HMRC introduced a new host of regulations that had the effect of shifting the jurisdictions in which QROPS could be established. QROPS were originally introduced in 2006 as part of a major overhaul of Britain’s pension framework, aimed at simplifying pension transfers to another country.

Because of foreign local laws and other business or pension administrative reasons, even though all QROPS are based on the same HMRC rules and template, some of the conditions and benefits vary between countries or even providers in the same territory.

When a country changes its legislation system and there are other pension rule changes, there are always loopholes in the pension laws which could be abused by expats and / or misinformed advisers. Because the pension pot is moved to an overseas jurisdiction, pension members can sometimes receive zero income tax on their pension pots.

A Financial Adviser / QROPS Specialists’ Role

A financial adviser with QROPS experience will determine whether a QROPS / ROPS is the best choice for your financial goals, then will guide you through the retirement process. It usually takes three or four months to process UK pension transfers to a QROPS, so members need to have some patience as many UK pensions try to delay the transfers or have administration in place which slow down the transfer process.

As QROPS trustees don’t deal directly with retirement savers, clients will need to work with a trusted financial adviser, preferably a QROPS specialist, who will tailor an offshore retirement plan to a client’s personal financial circumstances, taking into account the tax rules of the country where the QROPS scheme is based and those of the country where the expat lives.

These unique Double Taxation Agreements are crucial to how and when a ROPS gets taxed.

If you live in the same country in which your QROPS is based, retirement benefit payments will be taxed according to local rules in your country of retirement, but they may transfer the taxation rights to the country of your QROPS jurisdiction where an applicable Double Taxation Agreement exists or you could even be taxed in both, so it is vital to speak to a ROPS specialist.

QROPS, Risk, Investments and Transparency

A QROPS enables you to get all your pensions transferred to the same place, where you can access them online whenever you want, giving you greater visibility. You can also move ISA’s or other pension monies into a QROPS is you want it to form part of your pension. A QROP can offer tax advantages such as no tax on death when drawing pension benefits and can be transferred upon death.

Control over your investments is high and you can choose your investments to suit your investment objectives and risk tolerance. If you want full flexibility of drawdown of your pension, you can only access 25% as a tax-free cash lump sum rather than 30% which was previously allowed.

The range of investments is much broader than in an onshore pension, offering more currencies, commodity fund investments, bond funds, ETF’s, mutual funds, unit trusts and many other financial instruments allowing access to multiple international markets.

UK SIPPs offer great flexibility and have significant advantages over regular pensions and tax relief of up to 40% on contributions is still granted, although this may change in the next budget in 2016.

The main attraction when considering a ROPS over a SIPP is that HMRC may close the door on pension transfers or raise taxes in the UK. Once you have transferred out of a UK SIPP into a ROPS, HMRC cannot retrospectively change the rules. A ROPS is taxed offshore, not in the UK, which may mean lower income taxes and zero death taxes, depending on circumstances.

Can I Buy Property with a ROPS?

A ROPS cannot allow purchases of residential property or allow early access before the British pension age. That is where many Australian QROPS got delisted before. ROPS are increasingly popular with British expats due to currency and investment flexibility, the tax advantages they offer when drawing pension benefits and their ability to be transferred to beneficiaries of choice in the event of death.

Any funds left in a ROPS on the death of an investor can be passed on tax-free to the beneficiaries of the ROPS, providing they live outside the UK. After five full tax years of non-UK residence, funds in a ROPS are generally outside of the reach of UK inheritance tax, although the country where the investor is resident at death may request some tax. The ten year reporting requirement means that beneficiaries in the UK who receive money from the pot will have to pay tax and HMRC will be alerted.

Make sure your financial adviser updates your fact find by introducing regular tax and investment reviews every year. A ROPS will protect your pension from currency swings and make sure your pension is in a tax efficient environment.

Seeking a qualified ROPS adviser is crucial and our experienced offshore financial advisers will help fill out the pension transfer form on your behalf if you qualify for a ROPS transfer and it suits your retirement goals.

If you are unsure of where you will retire later in life, we recommend moving to a multi-jurisdictional ROPS scheme or a tax neutral ROPS in New Zealand or Hong Kong. If you would like further information of the new pension rules and want to request a consultation to see whether a move to a ROPS is a good fit for you, please email us for a free pension consultation with a ROPS specialist.

UK Pension Transfer Abroad - QROPS / ROPS Rules 2016 by

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