Pros and Cons of QROPS Pension Transfers for Defined Contribution or Defined Benefit Schemes

Recognised Overseas Pension Schemes (now abbreviated to ROPS rather than QROPS) are one of the many tax-efficient ways overseas expats can transfer their pension benefits to their new country of residence.

The challenge is that a pension transfer may be highly beneficial for one foreign national and financially risky for another. Much depends on the type of pension scheme you currently have and any benefits you stand to sacrifice if you opt for a QROPS transfer.

Here we explain the importance of assessing your pension scheme structure before making any long-term financial decisions – and some of the pros and cons to be aware of.

QROPS Transfer Decision-Making Factors

For many foreign nationals living abroad as expats, a QROPS transfer is a sensible safeguard, shifting pension assets held in their country of origin into an internationally accessible structure.

QROPS schemes are those approved by HMRC for UK citizens, although the number of available plans varies between countries and is often updated without notice.

Even if you have assessed the options and decided on a QROPS transfer, it remains important to verify the eligibility of your preferred scheme before you proceed with the transaction.

There are several reasons QROPS schemes are beneficial:

• Protection from future UK tax obligations, including the potential for the Lifetime Allowance (LTA) to be reinstated.
• Lower pension income taxation, depending on the new country of residence.
• The flexibility to draw lump sums without penalty or exposure to the limitations enforced on UK pension schemes.

Downsides of a QROPS transfer include possible exposure to the 25% Overseas Transfer Charge when transferring a UK pension fund to any overseas scheme – this is a tax levied by HMRC rather than a foreign tax office. Although this tax is not always actively applied, the possibility of losing a large proportion of your pension wealth should not be discounted.

It is also wise to consider exposure to further taxes on pension funds worth £1.073 million or more. Although the Lifetime Allowance (LTA) has been scrapped, a new Overseas Transfer Allowance (OTA) simultaneously came into force. Depending on the nature and value of the pension transfer, you may still be exposed to a 25% tax charge on any value above the threshold.

There is also the potential that the LTA will be reinstated in its previous form, although this depends on the outcome of the next General Election and future political events.

Note that if the OTA and Overseas Transfer Charge apply, or the LTA is reinstated, the two tax rates are normally offset to some extent. While there is unlikely to be a full 50% effective tax rate on any transferred pension funds, it makes sense to take advantage of opportunities to restructure pension assets before making a transfer.

This pre-emptive solution can mitigate any tax obligations arising or avoid triggering a supplementary tax liability unnecessarily.

Transferring a Defined Contribution Pension to a QROPS

A defined contribution pension fund is relatively straightforward. It will pay pension benefits based on the accumulated contributions made by you and your employer and how those investments have performed over time.

There are often no specific safeguards in place, and benefits are usually not guaranteed, which means the overall value of your pension assets could rise or fall.

The risks associated with a QROPS transfer from a defined contribution scheme are lower than for a defined benefit fund. The administrative costs of effecting a transfer are lower because the process is simpler.

Expats can opt to transfer a pension fund into a Self-Invested Personal Pension (SIPP) or QROPS fund to consolidate several pension plans into one place and ensure they have the flexibility and financial control over their retirement assets.

Our guide to SIPPs vs QROPS provides further information about how these two transfer options compare.

Transferring a Defined Benefit Pension to a QROPS

Defined benefit pension schemes, also known as final salary pensions, carry significant financial protection. These pension schemes provide guaranteed pension benefits, often for life, and may offer:

• Income payable to your financial dependants if you pass away, often half or two-thirds of your pension income entitlements.
• Tiered pension income increases to retain continual earnings with inflation over time.
• Safeguards against stock market highs and lows – even if your investments perform badly, your income is guaranteed and will not change.

Some defined benefit pensions cannot be transferred, regardless of whether you relocate overseas. These include public sector schemes linked to NHS or Civil Service careers. Other scheme providers may impose restrictions on transfer options, so it is wise to verify this position before investing additional time in comparing solutions.

Pension providers will usually require account owners to confirm they have received independent financial advice before enacting a QROPS transfer since sacrificing guaranteed lifetime income is a considerable commitment.

According to the Financial Conduct Authority regulations, you can only transfer any pension fund worth £30,000 or more in equivalent cash values with evidence of financial advice.

Limitations on QROPS Transfers for Defined Contribution or Benefit Pension Funds

Moving overseas is the most common scenario to consider transferring a pension fund to a QROPS.

There is the option of leaving some pension funds in the UK and accessing benefits from overseas, transferring part of your pension assets into a QROPS to take advantage of tax efficiencies and more flexible lump-sum withdrawals.

The advantage of having a British pension in the UK is that pension benefits and withdrawal options are unchanged, and there is less likelihood of encountering taxation problems, such as a tax charge on a lump sum not yet withdrawn.

Drawing a UK pension from abroad carries an exchange rate risk, where pension income paid in pounds may become worth less if the exchange rates change unfavourably. However, pension providers will typically charge to convert pension benefits and transfer the funds into an overseas account. You can only select a QROPS transfer from the limited list of recognised schemes approved by HMRC and there may be significant taxes to consider linked to overseas fund transfers and depending on the value of your pension.

The right decisions should always be based on the nature of your existing pension fund, the benefits you may sacrifice if you opt for an overseas transfer, and your long-term plans, such as when you intend to retire or whether you expect to make a lump-sum drawdown in the near future.

Professional QROPS Advice From the Specialist Expat Wealth Management Advisers

A QROPS transfer is not without risks. We always advise you to seek independent advice before making any decisions about your pension assets – because the most suitable options will vary between individuals and pension products.

The advantages of a QROPS transfer may not apply if you have a defined benefit pension fund with a guaranteed lifetime income. Retaining these rights and choosing an alternative safeguard to offset the exchange rate risk may be more beneficial.

QROPS are one of many potential options. There are other methods of accessing pension benefits from overseas without exposure to the Overseas Transfer Charge or depleting your pension assets by paying administrative pension fund charges.

For more advice about whether a QROPS transfer is right for you – or which options we might suggest that align with your financial goals – please get in touch with your nearest Chase Buchanan office for an initial discussion.

*  Updated June 2024