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 risk 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 Lifetime Allowance (LTA).
- Lower pension income taxation, depending on the new country of residence.
- The flexibility to draw lump sums without penalty or 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.
Pension funds that already exceed the UK LTA may be exposed to 25% taxation charged on the excess.
However, these two taxes are offset against each other, so they would not constitute a 50% effective tax rate. There may be opportunities to restructure pension assets before a transfer to mitigate the obligation or avoid triggering the LTA altogether.
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 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 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 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 are significant LTA and Overseas Transfer Charge taxes to consider.
The right decisions depend 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 different pension products.
As we have explained, the associated 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 align with your financial goals – please get in touch with your nearest Chase Buchanan office for an initial discussion.