One of the latest challenges for the international adviser is the overwhelming interest that international pensions are now receiving. A new acronym has been added to our financial planning vocabulary over the last few years: QROPS. For anyone who does not recognise this, it stands for ‘Qualifying Recognised Overseas Pension Scheme’.
The UK press recently reported that over £500 million had left UK-registered pensions for QROPS in the first two years since their introduction in April 2006.
A QROPS is an overseas pension scheme which satisfies certain criteria set down by the UK HM Revenue & Customs (HMRC) in relation to what benefits can be taken and when. The scheme must be outside the UK and the QROPS provider must agree to certain reporting requirements where a payment is made within five years of the member ceasing to be considered a UK tax resident.
To obtain QROPS status there are a number of layers which have to be satisfied. Firstly, it must be regarded as an Overseas Pension Scheme (OPS). This means the scheme cannot be a registered pension scheme, it must be established outside of the UK and recognised for tax purposes by the country in which it is established.
There is an additional requirement that to be regarded as an OPS either the QROPS must be regulated as a pension in the country in which it is established or if it is unregulated then the scheme must either be established in (a) a Member State of the EU or in Norway, Iceland or Liechtenstein or (b) the scheme's rules provide that at least 70% of a member's UK tax-relieved scheme funds will be used to provide an income for life.
Secondly, the scheme must meet the conditions to be a Recognised Overseas Pension Scheme (ROPS). There are three ways in which a QROPS could meet the ROPS rules. Option 1 the QROPS is established in a Member State of the EU, Norway, Iceland or Liechtenstein; or Option 2 the QROPS is established in a Country or territory with which the UK has a Double Taxation Agreement; or Option 3 the QROPS rules state that the scheme must be available to local residents, at least 70% of the transferred funds must provide an income for life, and benefits cannot be paid any earlier than normal pension age. This will be age 55 for anyone retiring on or after 6 April 2010. If either one of these options are fulfilled then the ROPS status will be achieved.
To obtain the ‘qualifying’ status, the trustees of the scheme must agree to inform HMRC if any payment is made within five years of the member ceasing to be considered UK tax resident.
The importance of the qualifying status is essential if a member is to avoid an unauthorised payment charge. Some additional points of clarification have followed since the introduction of the QROPS rules:
-
It has been confirmed that a transfer to a QROPS would not be regarded as a transfer of value for inheritance tax purposes; this also introduced the concept of Qualifying Non-UK Pensions Schemes (QNUPS).
-
It has also recently been confirmed that residential property is not a permissible investment within a QROPS.
This clarification highlights the importance of keeping informed of the developments on this subject.
QROPS provides an international pension solution for clients who have retired abroad, and gives clients the opportunity to review their UK pension arrangements as part of their lifestyle financial planning.
With the growth in interest on this topic, having an adviser who can demonstrate knowledge of UK and local pension rules is crucial for the international client. A full assessment of current pension arrangements both in terms of fund and additional benefits such as spousal pensions, dependent pensions and the value of these must be factored into any decision to transfer. QROPS offer potential flexibility but this should not be at any cost.
Qualifying non-UK pension schemes (QNUPS)
The Finance Act 2008 contained provisions that extended the inheritance tax protection given to registered pension schemes to qualifying non-UK pension schemes. Regulations that came into force on 15 February 2010 define the conditions that have to be met for a scheme to be a qualifying non-UK pension scheme. To qualify a scheme must satisfy certain regulatory and tax-recognition conditions equivalent to those that apply to a QROPS.
For clarity a QROPS will also be a QNUPS but a QNUPS will not always be a QROPS.
To be regarded as a QNUPS the scheme must meet the criteria to be considered a ROPS. However, one of the key differences is that there is no requirement for there to be a Double Taxation Treaty even if the scheme jurisdiction is outside of the EEA. This is because there are no reporting requirements for a QNUPS to HMRC.The information provided in this article is not intended to offer advice.
It is based on Skandia's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Skandia cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.