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QROPS - Your questions answered

This article aims to provide generic information for financial advisers about the features of Qualifying Recognised Overseas Pension Schemes, transferring into Qualifying Recognised Overseas Pension Scheme and tax reporting to UK HM Revenue & Customs.
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Please note that specific regional or jurisdictional variations have not been explored below.

The basics

What are Qualifying Recognised Overseas Pension Schemes (QROPS)?

QROPS are overseas pension schemes, which meet the UK regulations to be regarded as Recognised Overseas Pension Schemes (ROPS); and they also have agreed with HM Revenue and Customs (HMRC) to carry out reporting of benefit payments in return for approval as a QROPS.
 
To be regarded as a ROPS, the scheme must meet the rules to be an overseas pension. In summary, the scheme must either

  1. be regulated as an occupational pension scheme in the country or territory in which it is established or 
  2. if it is not an occupational pension but it is regulated as a pension in the country in which it is established, or if no such regulated body exists the following conditions need to be met:
    (a) the scheme is established in a Member State of the European Union, Norway, Iceland or Liechtenstein; or
    (b) the scheme rules provide that at least 70% of the funds transferred must be used to provide the individual member with an income for life payable no earlier than the normal minimum pension age (unless in ill health).

In addition, it must meet the following requirements:

  • It must be approved, registered or recognised as a pension by the tax authorities in the country or territory in which the scheme is established.
  • Any tax relief (including tax exemptions) applying to the pension benefits must be the same (or substantially the same) for local and overseas members of the scheme.
  • It must meet one of the three following requirements:

(a) have met the overseas pension rules described in   

(b) At the time a transfer occurs the scheme must be open to local residents and meet the overseas pension rules decribed in 2(b) above.

(c) be a KiwiSaver scheme as defined in section 4(1)(interpretation) of the KiwiSaver Act 2006 of New Zealand.

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How are QROPS structured?

The local jurisdiction will set out how the local pension scheme is structured, however many QROPS follow a similar structure:

  • There is a master trust set up which appoints a corporate trustee (the QROPS provider) and their powers, roles and responsibilities in terms of administering the QROPS.
  • The trustee must be based outside the UK for the scheme to be considered as a QROPS.
  • There are usually wide investment powers allowing flexibility for the trustee to invest in a wide range of assets – for example cash, bond, property, hedge, equity and commodity funds.
  • The trustee of the QROPS holds these investments on the member’s behalf and has investment powers. They will often appoint an Investment Manager to switch investments on their behalf as market conditions change.
  • The trustee would also be responsible for making payments of benefits from the QROPS to the member.

How is QROPS status obtained?

The local jurisdiction will have rules within local legislation and practice which need to be adhered to in order to qualify as a local pension. In addition, if the local provider would like to become a QROPS provider they must meet a number of HMRC rules relating to how and when benefits can be taken, along with defined reporting requirements while the member is UK resident and for ten complete tax years after the member has left the UK. The rules of the scheme must be broadly equivalent in terms of payment of benefits to a UK-registered pension scheme to maintain their QROPS status.

Where the jurisdiction rules and the HMRC QROPS approval rules differ, which rules will apply to the scheme?

In order to obtain QROPS approved status, the HMRC minimum requirements must be met. Where the rules in the jurisdiction in which the QROPS is based are more stringent, then these will apply to the scheme.

Consequently, where the local rules are less stringent, then the HMRC minimum requirements must apply in order for the QROPS provider to meet the undertaking it gave to HMRC.
It is therefore always important to consider the local legislation governing pensions when choosing a QROPS provider.

Do all overseas pension schemes qualify as QROPS?

No. Attempting to transfer into a scheme which is not a QROPS will result in unauthorised payment charges of up to 55%. Generally, this would be taken from the transfer value.

Who can move their pension into a QROPS?

Anyone who has a UK-registered pension scheme, subject to any requirements imposed by the QROPS provider.

Why might an individual want a QROPS?

An individual leaving the UK may need more pension flexibility and with a QROPS, after five complete tax year, they can benefit from:

  • The pension laws of the jurisdiction in which the QROPS provider is based.
  • Possible lump sum flexibility
  • Some protection from currency conversion fluctuations as most QROPS can accept contributions and make payments in more than one currency.
  • Removal from effects of UK income taxes.

Transferring into a QROPS

When can UK pension rights be transferred outside the UK into QROPS?

They can be transferred either before the individual commences benefits or once they have come into payment. It is unlikely, however that the provider of a final salary scheme would permit a transfer once the pension is in payment.

It is worth noting that an individual can transfer an annuity overseas, however the annuity can only be transferred to a European Economic Area (EEA) Insurance Company.

What is the minimum transfer that can be made into a QROPS?

There is no minimum level according to the regulations, but individual QROPS schemes may set a minimum requirement.

Additionally, transferring small pension schemes into a QROPS may not be cost-efficient.

How long does it take to transfer a pension into a QROPS?

This will depend on the transferring scheme’s service standards, however, in general the process can take a couple of months; that said, where a transfer is from an occupational pension scheme the process can take substantially longer.

Are there any restrictions on benefits that can be taken from a QROPS?

Yes. A payment within 10 years of the member becoming non-resident in the UK is reportable to HMRC, and if the payment is made within 5 tax years of the member becoming non-resident in the UK, it is subject to the member payment provisions that apply to registered pension schemes. Generally, if the payment is subject to the member payment provisions, this means that benefits being paid by the QROPS in this period, in relation to a member’s UK tax-relieved scheme funds, will have to meet the requirements that would apply to a UK registered pension scheme. A member’s UK tax-relieved scheme funds comprise of the amount crystallised on the transfer to the QROPS and any tax-relieved contributions made to the QROPS whilst the member is UK resident. Please note that any growth on the transfer sum within the QROPS is exempt from the member payment provisions.

Additionally, to meet the requirements to be a QROPS the scheme may have had to confirm that its scheme rules provide that at least 70% of the member’s transfer fund will be designated to provide an income for the member. This will certainly be the case where, for example, the QROPS is not regulated by a body in the country or territory in which it is established. Unlike the member payment provisions described above, this rule applies throughout the period that the individual is a member of the QROPS, and not just for 10 years following the member becoming non-resident in the UK.

In all cases the rules of the local jurisdiction have to be considered as they may be more restrictive than those explained above.

Do you have an example of how this might work in practice?

A transfer is made to a QROPS in 2009. The value transferred is £100,000.

Benefits taken in 2013 when the value of the QROPS has increased to £150,000, (no other transfers or UK relieved contributions received). The member has been resident within the UK in the preceding 5 tax years.

The total lump sum payable can be calculated as follows:

UK tax relieved - Pension commencement lump sum from the transfer funds will equate to:

£100,000 at 25% = £25,000

The additional £50,000 growth will be subject to the local jurisdiction rules. So for example in Guernsey the lump sum is calculated at 30% of the fund value then:

£150,000 at 30% = £45,000 (Lump sum allowable under Guernsey rules).

Then a maximum of £45,000 can be paid to the member.

In this example, £25,000 is being paid under the UK rules. If the further £20,000 is paid under the Guernsey rules, this additional £20,000 will be subject to the UK member payment provisions, and will it incur an unauthorised payment charge of 55%. This is because the lump sum is treated as being taken from the UK tax relieved funds first.

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What would the situation have been had the member been non-resident for more than 5 tax years?

Using the same details in the example above, and assuming to meet the QROPS requirements the scheme has to provide that 70% of the transfer funds will provide an income for life, the maximum pension commencement lump sum from the transfer funds will equate to:

£100,000 at 30% = £30,000

The additional £50,000 growth from the scheme will be subject to the rules in the jurisdiction, but the residual of the transfer fund after pension commencement lump sum (i.e. £70,000) can’t provide further cash lump sums without jeopardising the status of the QROPS.

Can Protected Rights or Guaranteed Minimum Pension (GMP) funds be transferred into a QROPS?

Generally yes, as long as the receiving QROPS is willing to accept it. Where GMP is held in a Section 32 (buy out) policy, the provider might not permit a transfer to QROPS where, due to underlying investment conditions, there is insufficient value within the Section 32 to cover the GMP liability.

Why does the individual making the transfer not need to be an employee of the company providing the QROPS?

A QROPS does not need to be an Occupational Pension Scheme (OPS) or be employer sponsored, where such a requirement would be needed. Most QROPS will be personal arrangements of some kind, however the tax rules of the jurisdiction where the
QROPS is based may restrict the type of arrangements available.

What happens if the transfer is greater than the lifetime allowance?

A transfer from a registered pension scheme to a QROPS is a benefit crystallisation event (BCE) whether or not the member is UK resident, has been UK resident in the past five tax years, or is no longer regarded as a UK resident.

The amount crystallised is the amount transferred. Generally, this means it will give rise to an additional tax charge where the transfer exceeds the individual’s unused lifetime allowance (LTA). The lifetime allowance reduced from £1.8 million to £1.5 million from 6 April 2012. And is set to reduce again to £1.25 million from 6 April 2014.

If the transfer results in the member's LTA being exceeded, the rate of tax chargeable is 25%. The 55% rate cannot apply, even though the payment is in effect a ‘lump sum’, because it is not being paid ‘to the individual’, so does not fall within the 55% rate charging provision.

Does the payment of benefits from the QROPS affect the lifetime allowance?

No. The taking of benefits relating to the transferred amount from a QROPS is not a benefit crystallisation event for the purposes of the individual’s lifetime allowance.

Options for existing QROPS

Whilst the member is a non-UK tax resident, can the QROPS receive additional funding from the individual or employer?

Yes, subject to the rules of the QROPS provider and any regulation in the jurisdiction in which they reside. These contributions would not qualify for UK tax relief.

What if the member of the QROPS returns to the UK?

If the member returned to the UK, it would be possible for the member or employee to make additional contributions (assuming the scheme rules of the QROPS allowed this). The contributions made in the UK may qualify for tax relief if the member is classed as a migrant member.

A migrant member is defined in the Finance Act 2004 as an individual who came to the UK as an existing member of an overseas pension scheme. Migrant member relief can only be obtained where the following criteria are met:

  • The member is resident in the UK when the contribution was made.
  • The member has relevant UK earnings chargeable to UK tax.
  • The contribution is paid to a qualifying overseas pension scheme.
  • The member was a member of the qualifying overseas pension scheme before they became resident in the UK, and continued to be a member of that scheme when they became resident in the UK and made contributions to that scheme.
  • The member was at any time in the 10 years before the beginning of residence in the UK entitled to tax relief in respect of contributions to the scheme under the law of the country or territory in which the member was then resident.
  • The scheme manager has notified the member that they will advise HMRC of any benefit crystallisation events in respect of that member.
  • The member has notified the scheme manager of an intention to claim relief.

How long after a transfer into a QROPS can benefits be taken?

Assuming the member is old enough to take benefits, technically the benefits can be taken from the day of transfer (subject to the rules of the QROPS provider). However, some schemes will have a minimum term of five years (unless the client has less than five years to retirement).

Generally, if the member has only been non-UK resident for less than five years, it is not possible to receive benefits any earlier than the UK minimum retirement age (age 55 since 6 April 2010). Otherwise, any payment would be subject to an unauthorised payment charge.

The rules of the local jurisdiction will determine the earliest age benefits can be taken. However, unauthorised payment charges could apply if benefits are taken before the normal UK minimum pension age, and the member had been UK resident at some point in the preceding five tax years.

On divorce, can a UK pension sharing order apply to a member’s QROPS?

Pension sharing orders are only recognised in the UK as they are issued by the UK courts and they do not have any powers over other jurisdictions.

An order would therefore not be enforceable outside of the UK. In view of this, it would be at the discretion of the trustees for the QROPS scheme whether they agreed to assign some of the member’s benefits to the ex-spouse or civil partner.

It is likely that the scheme will require:

  • due diligence on the ex-spouse or civil partner,
  • a full understanding of exactly what is to be achieved (i.e. if the ex-spouse dies, do the funds revert to the member, or are they to be paid out to named beneficiaries); and
  • the member to also sign appropriate legal deeds to give up rights under the QROPS if the scheme trustees did agree.

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If a QROPS provider includes taxable property within the investment vehicles for the scheme what affect will this have on the QROPS?

Taxable property (including residential property) held at any time (not just the five tax years after the member leaves the UK) is not allowed within the QROPS rules.

Where a UK resident member has already transferred to a QROPS and HMRC becomes aware that the scheme includes investment into taxable property* at any time then this will be treated as taxable property and unauthorised payment charges will apply. The QROPS provider may also lose their approved status.

*Taxable Property is defined by HMRC as ‘residential property and most tangible moveable assets. Residential property can be in the UK or elsewhere and is a building or structure, including associated land that is used or suitable for use as a dwelling. Tangible moveable property is things that you can touch and move. It includes assets such as art, antiques, jewellery, fine wine, classic cars and yachts’.

If HMRC removes a scheme’s QROPS status, what does this mean for the member?

Where a UK resident member has already transferred to a QROPS and HMRC subsequently rescinds the QROPS status, the member will not be subject to an HMRC tax charge as a result of this action.

However, currently the scheme member will be responsible for reporting any future payments that the scheme makes to them while they are UK resident or if the scheme member was non-UK resident for less than ten complete tax years at the date of payment.

If the payment is unauthorised then an unauthorised payment charge will be payable.

HMRC has stripped all Singapore-based QROPS of their approved status, because Singaporean pension scheme rules did not fit with HMRC requirements for QROPS. HMRC has been adamant that it will take action ‘against any abuse it finds’.

It is worth noting that the UK Government did state in the Budget 2012 document:

"2.69...where the country or territory in which a QROPS is established makes legislation or otherwise creates or uses a pension scheme to provide tax advantages that are not intended to be available under the QROPS rules, the Government will act so that the relevant types of pension scheme in those countries or territories will be excluded from being QROPS. (Financial Bill 2013)."

This statement clearly shows HMRC's intention to ensure that QROPS are not used as a means of tax avoidance. 

From 6 April 2013, any QROPS that has its status rescinded by HMRC, or chooses to cease being a QROPS, must continue to meet the reporting requirements in respect of member benefit payments made when the member is UK resident or non-UK resident for less than 10 complete tax years.

If HMRC removes a scheme’s QROPS status, can the member transfer to another QROPS provider?

Yes. That provider has to ensure they are able to ascertain which contributions are UK-tax relieved as a condition of accepting the transfer. Where all contributions made to the now unauthorised scheme were made before their QROPS status was removed then the scheme member will not incur an unauthorised payment charge when a transfer to a new QROPS is made.

When could a QROPS provider change other than when the member requests a transfer to another QROPS provider?

A QROPS provider will only change where the corporate trustee has ceased trading. In this situation, a suitable replacement trustee would need to be appointed for the QROPS in the short term and the scheme member could choose to transfer to another QROPS provider.

HMRC reporting requirements

Does QROPS reporting cease after a UK member has been absent from the UK for more than ten full tax years?

A payment (or a deemed payment) will not have to be reported to HMRC by a QROPS if the member is not tax resident in the UK when the payment is made and has neither been UK resident in that tax year, nor in any of the previous ten tax years.

However, a QROPS will need to check on the position when a payment is made as the member could have become UK resident again after a period of non-residence in which case the payment must be reported.

Until that full ten tax year cut-off date or if the member is UK resident at the time of payment, the QROPS trustee is obliged to let HMRC know about any withdrawals, payments, or transfers made from the individual’s account within 90 days of the payment being made. HMRC will then determine whether the payment is authorised or unauthorised and will be able to contact them directly.

What happens if a member returns to the UK before having taken the benefits?

The member is required to inform the QROPS that they have returned to the UK. If the member then transfers their funds, or takes benefits from the QROPS, the scheme has to report the payment to HMRC regardless of how long the member was non-UK resident previously. Failure by the scheme to report the payment may result in their QROPS status being removed.

What happens if a QROPS loses its approved status and the member returns to the UK before having taken the benefits?

Currently, the member is required to report any taxable events that the QROPS providers would have reported to HMRC when they were approved, unless or until the member chooses to transfer to a new provider with QROPS status.

From 6 April 2013, any QROPS that has its status rescinded by HMRC, or chooses to cease being a QROPS, must continue to meet the reporting requirements in respect of member benefit payments made when the member is UK tax resident or non-UK resident for less than 10 complete tax years.

Failure to meet this requirement may result in financial penalties for the former QROPS..

If a contribution is made to a QROPS whilst a member is not UK tax resident how does this impact the 30/70 split?

If the non-UK tax resident member did not receive UK tax relief on the contributions made to the QROPS whilst being a non-UK tax resident then they would not form part of the member’s UK tax-relieved scheme funds and therefore would not be subject to the 30/70 split. Any growth on the transferred funds will also not be included in the 30/70 split.

It is a requirement of the QROPS rules (relating to member payments from transferred funds) that a QROPS must keep a record of the amount of the member's ‘transfer fund’.

For example (assuming the member payment provisions no longer apply to John).

John has moved to Cyprus and makes a transfer from his UK pension to an Isle of Man (IOM) based QROPS. The transfer value is £250,000. A few years later John pays an additional contribution of £50,000 to the QROPS. At this time the value of John’s pension fund has grown to £340,000. If John were to take his pension benefits then:

• 70% of the transfer value (ie £250,000) has to provide an income for life (70% of £250,000 = £175,000)

• 30% of transfer value (ie 30% of £250,000 = £75,000) can be taken as a lump sum free from UK tax.

The additional contribution (ie £50,000) plus any growth on the additional contribution; and any growth on the transfer value, may be taken as a lump sum (subject to IOM rules) as not subject to the 30/70 split rules.

The growth on the additional contribution and the growth on transfer value total £40,000 in this example. Therefore £165,000 (£50,000 additional contribution, £40,000 fund growth and £75,000 lump sum allowance) can be taken as the total lump sum (subject to IOM rules).

Cypriot rules and regulations will also need to be considered.

In the previous example, would the £165,000 lump sum be tax free?

It is a possibility but will depend upon the tax rules governing the QROPS in the country where it is based as well as the tax rules applying where the individual is tax resident and any double taxation agreements between the two.

For example an individual may be taxed on any interest, income or growth on the funds on bringing the funds back into the UK e.g.if they are held in a UK bank account.

However, drawing a lump sum may not be as important to an individual outside the UK where the impact of tax on income and inheritance tax may be much reduced. Therefore unless a large sum is required, drawing regular income may be preferable.

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What member payment charges can apply, where the scheme member is UK resident or has left the UK less than five tax years before a benefit payment is made?

There are various member payment charges that can apply to a UK resident scheme member of a QROPS. These include:

  • Unauthorised payments.
  • Tax charges on lump sum death benefits from drawdown.
  • Tax charges on lump sum trivial commutation of benefits.

Where a member has transferred to a QROPS and returns to the UK, will assets within the scheme benefit from the UK pension fund taxation advantages on income and growth?

No. The assets within the QROPS will be subject to the rules of the relevant tax authority in the country or territory in which the assets are situated, however, see details on taxable property above.

For example, if a member of a Guernsey based QROPS has their funds invested into an Isle of Man life assurance bond, then the funds will be subject to Isle of Man fund taxation. Currently, there is no taxation of funds held within a life assurance bond in the Isle of Man (other than withholding taxes on the underlying assets).

Where a member has transferred to a QROPS and returns to the UK, if they take an income from the pension is this regarded for income tax purposes as earned income?

It is likely that this will be the case. The existence of a double taxation treaty between the jurisdiction where the member resides and the jurisdiction of the QROPS provider is likely to be important.

For example, some jurisdictions may impose withholding taxes at source on benefits paid from the QROPS and in this case a double taxation treaty can ensure that the member can take the withholding tax into consideration when looking at any UK income tax.

For details of the taxation of a QROPS where the underlying investment is an offshore investment bond, please see our article "QROPS and Chargeable Events".

Where a member has transferred to a QROPS and returns to the UK, will the UK pension rules for tax-free cash, retirement age and IHT apply?

The rules in the jurisdiction where the QROPS is based will govern these figures. However, where the local jurisdiction offers less stringent rules than in the UK, there may be member payment charges imposed in the UK. There may be local taxation as well as UK taxation depending on the jurisdiction of the QROPS provider. The existence of a double taxation treaty is therefore likely to be important.

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