One of the big financial decisions for prospective expatriates planning a move abroad is how to manage their pension fund. Retirement savings built up over the years can be high-value and protecting your pension and ensuring you have the means to enjoy your overseas retirement is essential.
QROPS, now renamed ROPS, are a potential solution. The abbreviation stands for Qualifying Recognised Overseas Pension Scheme, updated in 2015 to ROPS (Recognised Overseas Pension Scheme).
A ROPS transfer may be a viable option if you wish to transfer a British pension fund to a different country. Still, this is only possible in certain jurisdictions with schemes listed in the HMRC Approved List, which is regularly revised.
What Is a QROPS / ROPS?
HMRC can impose steep tax liabilities of up to 55% if you transfer a UK pension fund to a non-compliant scheme not included on the approved list. Choosing an approved fund does not guarantee a zero-tax transfer but does mean you avoid non-compliance levies.
Transferring a UK pension to a ROPS in another country provides benefits in terms of estate planning, flexibility, currency risk exposure and taxation but is not necessarily a universally advantageous option.
A scheme included within the ROPS list must meet HMRC rules, introduced in 2006, which allow British nationals to relocate and transfer their pensions with them, but inclusion on the approved list is subject to meeting terms linked to UK pensions, such as access restrictions before age 55.
Where Are ROPS Available?
Current approvals include the EU-approved fund, The Pension Scheme of the European Union, and schemes in Australia, New Zealand and Canada.
However, there are many overseas locations without any options within the approved list, including the USA.
It is therefore advisable to seek advice before selecting a ROPS transfer, whether you are moving to a country without approved schemes, would like to evaluate alternatives, or are unsure whether a ROPS is the most financially secure option.
Pros and Cons of QROPS Transfers
A drawback to ROPS is that the approved list is changeable, updated regularly, and excludes multiple countries popular with expats. There are also no specific funds within many European countries, leaving expats with the options of:
- Selecting a suitable ROP in a neighbouring EU country.
- Opting for the single EU-wide approved fund.
- Evaluating alternative pension or investment structures to protect their retirement wealth.
There are no schemes on the approved list within Cyprus, Portugal, France or Spain, for example, so this issue is not restricted to smaller or less globalised countries.
Selecting another EU or EEA-based scheme permits UK citizens to relocate, transferring their pension without triggering penalties. However, the overseas transfer charge of 25% may apply to any international pension transfers.
Once pension funds have been successfully transferred, they are protected from exposure to UK taxes.
While recent reforms to the Lifetime Allowance (LTA) have changed the tax liabilities relating to higher-value pension funds, a QROPS transfer continues to be a good opportunity for expats to protect themselves from future changes, and the potential reintroduction of a similar or new tax regime.
Key Benefits of ROPS Transfers
While careful consideration should be applied to any long-term financial decisions, ROPS do provide potential advantages. They are more flexible than other pension funds and allow greater access to drawdown your pension income as you wish, with up to a 30% lump-sum withdrawal, as opposed to a standard 25% threshold.
Other positive aspects of a ROPS transfer include the following:
- From an estate planning perspective, ROPS allow holders to decide how to allocate their pension wealth in their will and select any named beneficiary without needing to adhere to the rules affecting most UK pensions.
- There are multi-currency options to invest in alternative denominations, which can mitigate or remove the currency risk normally associated with receiving a UK-held pension in another jurisdiction.
Most ROPS have more diversification and customisation opportunities without as much overexposure to UK-based investment assets, allowing owners to select the right investment plan to align with their risk appetite, income expectations and timescales.
There are, however, restrictions in that you may only be eligible for a ROPS if you intend to live overseas for at least five years, have not purchased an annuity, and do not have a final salary pension fund where you have already made drawdowns.
Alternatives to a QROPS Transfer
While ROPS can provide tax efficiencies, they are one of several options, and the lack of approved schemes in many countries can make them unavailable or unnecessarily complex where the only compliant option is to select an alternative fund in a different country, such as another country within the EU.
Self-Invested Personal Pensions (SIPPs) are one of the primary alternatives and usually work as defined contribution pension funds that act as pension wrappers, with rules about accessing benefits before age 55. Similarly to ROPS, SIPPs provide enhanced flexibility and broader investment choice.
Expatriates can opt for international or UK-based SIPPs but can hold a British fund and draw down up to 25% of the fund tax-free without incurring the overseas transfer charge normally levied against ROPS transfers.
Expats who remain UK taxpayers can continue to benefit from tax relief on pension contributions. However, overseas residents are only eligible for tax relief for the first five years, capped yearly.
The advantage of a SIPP over another personal pension is that the owner has the freedom to choose how their funds are invested, with a much wider range of potential investment choices. Examples include listed and unlisted stocks in any country, investment trusts, ETFs, cash and gilts and bonds, allowing for tailored diversification and ongoing fund management.
Please download our complimentary Guide to SIPPs v QROPS for further information about how these pension transfers compare for expatriates and those planning an international location.
Professional Pension Transfer Advice
Any overseas pension transfer has multiple factors to evaluate, from tax exposure to drawdown options, lump-sum benefits and exposure to transfer charges. It is always advisable to seek support from an experienced adviser with the necessary experience to help you make informed decisions.
If you are unsure whether a ROPS is the right option for you, would like guidance about the ROPS available in your intended relocation destination, or want to assess the pros and cons of varied opportunities to transfer your pension wealth, please contact your nearest Chase Buchanan office at your convenience.
*Information correct as at March 2023