The Qualifying Recognised Overseas Pension Scheme (Qrops) system was first introduced in April 2006.
It was designed to allow UK expats permanently living overseas to simplify their affairs and enable them to continue to save to provide an income for retirement by allowing their UK pensions transfer to a QROPS based pension based in their new country of residence.
The system was intended to limit the lump sum and pension benefits available to the transferring individual to be chiefly equivalent to the benefits that would have been available to them had they left their pension in the UK.
The government provides tax relief on contributions made to registered UK pension schemes, and investments made within those schemes are generally free from income tax and capital gains tax.
If a transfer is made from a UK registered pension scheme to a Qrops then, until recently, it has been free of tax provided it does not exceed the individual’s lifetime allowance.
HM Revenue & Customs completed a review of the system in 2012 and found that Qrops were:
being marketed primarily as a way to avoid UK tax;
being used to facilitate early access to UK tax relieved pension funds;
being used by some individuals, based overseas or in the UK, in countries bearing no relation to where they live.
This clearly contradicts with the original reasons for allowing transfers of UK pension schemes that have benefited from UK tax relief, to be made free of UK tax to a Qrops.
HMRC needed to be more confident that Qrops were being used as originally intended rather than for tax avoidance; so a number of updates to the regime have been made since then.
What is a Qrops?
A qualifying recognised overseas pension scheme is a scheme that must not be a UK registered pension scheme and must meet the four following definitions at all times:
The scheme must be a pension scheme;
The pension scheme must be an overseas pension scheme;
The overseas pension scheme must be a recognised overseas pension scheme; and
The recognised overseas pension scheme must become a Qrops as defined by the regulations. That is, the scheme will operate the overseas transfer charge and undertake to comply with the information requirements as prescribed by HMRC.
Recognised overseas pension schemes (Rops)
To be a Rops, the scheme must meet a number of conditions, particularly:
The tax recognition test – there are three elements to this test which aims to ensure that the pension scheme is ‘recognised for tax purposes’ under the tax legislation of the country or territory in which it is established.
The regulatory requirement test – this aims to identify a regulator in the other country that oversees legislation/guidelines that impacts directly on the operation of the pension scheme, to ensure that pension schemes are administered soundly in order to protect members’ interests.
The pension age test – to ensure retirement benefits are not paid before age 55.
The benefits tax relief tests – to ensure that any tax treatment of pension benefits is consistent across the scheme for residents and non-residents of the country in which it is established, the scheme must be based in an EU member state or a country with which the UK has a relevant tax information exchange agreement.
Overseas public service pension schemes and schemes set up by an international organisation (e.g. the EU or the United Nations) to provide benefits to, or in respect of, their employees do not have to meet either the ‘Benefits Tax Relief Test’ or the ‘Pension Age Test’ to be a Rops.
Collectively, these conditions aim to ensure the scheme is treated as a pension scheme for regulatory and tax purposes in the country in which it is established and that it is open to residents of the country in which it is based.
The administrator of the scheme must confirm it meets the condition to be a Rops by completing HMRC form APSS251 at outset, and then every five years.
HMRC maintains a list of recognised schemes (Rops list) and will give them a reference number. Inclusion on the list does not mean the scheme is approved by HMRC, nor that it is automatically a qualifying scheme (Qrops).
It is up to the scheme managers of each Rops to ensure their pension scheme continues to meet the requirements to be a qualifying scheme (Qrops).
UK Pension transfer to QROPS
A transfer from a UK registered pension scheme to a Qrops is a recognised transfer.
A transfer from a UK registered pension scheme to an overseas scheme that is not a Qrops is not a recognised transfer and will therefore be an unauthorised payment.
The payment will be subject to unauthorised payments tax charges. A charge equalling 40% of the amount transferred is payable by the individual and in some cases, an additional surcharge of 15% will also be levied – again, this is payable by the individual.
A further charge of at least 15% of the amount transferred will apply to the transferring scheme administrator. If they have completed a full transfer out, it will not be possible to deduct this from the scheme and the transferring scheme administrator will be liable to pay from their own funds.
The potential tax charges involved mean that UK registered pension schemes will undertake their own checks on the status of the receiving scheme.
UK Pension Transfer process
When a UK scheme receives a request to transfer to a Qrops, they should (within 30 days of the request) ask the member to provide certain information and sign a declaration stating they understand that the transfer could lead to significant tax penalties. The member can provide this information and declaration either in a letter, or by completing and signing HMRC form APSS263.
This should be completed, signed and returned by the member within 60 days of their original request for the transfer.
The transferring scheme should undertake its own checks to ensure the receiving scheme is a Qrops and therefore any transfer is a recognised transfer for the purposes of the legislation.
A lifetime allowance test must also be carried out at the point of transfer.
Once the transfer is complete, the transferring scheme provides a list of information to HMRC. This includes details of the individual making the transfer, the transfer itself, and the Qrops receiving the transfer.
This information must be supplied to HMRC within 60 days of the transfer by using form APSS262.
A transfer made to a Qrops by an individual before they reach age 75 is a benefit crystallisation event, BCE8. A test must be carried out against the member’s lifetime allowance for any amount crystallising.
The amount crystallising at BCE8 is the total of the cash plus the market value of any assets transferred. There is an allowance for any funds previously designated to drawdown or scheme pension.
Any part of the transfer payment crystallising over and above the individual’s lifetime allowance will be treated as a retained amount and subject to a lifetime allowance excess tax charge of 25%. This will be accounted for and paid to HMRC by the transferring scheme.
The scheme administrator must tell the member if any tax is due and the percentage of standard lifetime allowance used up by the BCE8.
If the transfer is subject to the overseas transfer charge as outlined below then the amount to be deducted for the payment of the overseas transfer charge does not reduce the amount to be crystallised through BCE8, although it will reduce the amount actually received by the Qrops.
The overseas transfer charge
Following another update to the Qrops rules, all transfer requests made on or after March 9 2017 must be assessed to determine if they are subject to the overseas transfer charge.
The five conditions used to make this assessment are below – as long as one of these conditions are met, the overseas transfer charge does not apply:
The member is resident in the same country in which the Qrops receiving the transfer is established.
The member is resident in a country within the European Economic Area (EEA) and the Qrops is established in a country within the EEA.
The Qrops is set up by an international organisation to provide benefits in respect of past service as an employee and the member is an employee of that organisation.
The Qrops is an overseas public service pension scheme and the member is an employee of an employer who participates in that scheme.
The Qrops is an occupational scheme and the member is an employee of a sponsoring employer of the scheme.
In broad terms this means that where the individual is transferring their pension to a country that they are not resident in, the overseas transfer charge will apply, unless it is their employer’s scheme or both the pension and the member are in an EEA country.
Gibraltar (as part of the UK) and Malta are both EEA countries; however, other previously popular Qrops destinations such as Guernsey, Jersey and Isle of Man are not.
If applicable, the charge is 25% of the value transferred. The individual and transferring scheme administrator are jointly and severally liable for this charge which must be declared on the ‘accounting for tax’ return submitted by the UK pension scheme.
The charge will typically be made by the transferring scheme before completion of the transfer.
Payments made from the receiving Qrops
HMRC may request detailed information from the receiving Qrops provider about any transfer. The Qrops provider must provide this information within 60 days of the request.
The Qrops must also report lump sum and some pension payments to HMRC within 90 days of the payments being made. This requirement applies for 10 years following the date of the transfer, regardless of where the individual is resident.
Any income payments from a Qrops will be subject to UK tax if the individual is a UK resident when they receive the payment.