Brendan Harper outlines the basic concept of QROPS and details the advantages it offers to expats
Last month I highlighted the welcome changes in this year's UK Finance Bill to reintroduce IHT exemptions to certain foreign pension schemes.
At the time of writing, draft regulations outlining exactly which schemes will be exempt are still not published. However, it is expected that QROPS will be included, so this month I will look at the concept of a QROPS and its advantages to UK expatriates.
A QROPS (qualifying recognised overseas pension scheme) is a foreign pension scheme that is capable of accepting a transfer value from a UK-registered pension scheme. This is something that might be of interest to any former UK resident who has accrued pension funds in the UK, and who intends to remain outside the UK permanently.
A scheme can be recognised as a QROPS upon application to HMRC and confirmation that it meets certain criteria. The criteria are set out in the box below.
In addition to this, the trustees or administrators of a QROPS must agree to provide HMRC with certain information, including any changes that would cause the scheme to fail the QROPS test, and payments made to members. However, this reporting requirement is only necessary where the member is either a UK resident or has been a UK resident in the last five years.
As many QROPS are based in non-EEA member states, the scheme must have the following main features before it can be recognised as a QROPS:
- it is recognised for tax purposes - in other words, it is open to residents of the country where it is based, and either tax relief is given on contributions with corresponding taxable income, or no tax relief is given with corresponding tax-free income;
- the maximum lump sum that can be taken on retirement does not exceed 30% of the fund value; and
- the minimum retirement age is not earlier than the UK normal minimum retirement age (age 50 for the period before 6 April 2010, and age 55 after 6 April 2010).
Benefits to expats
There are several benefits for expatriates who transfer their UK pensions to a QROPS, including:
- No lifetime allowance charge
Members will no longer be subject to the lifetime allowance charge. This is a restriction on the total permitted value of an individual's total accrued fund value in UK-registered pensions, currently £1.8m. Those who exceed this value face a potential tax liability of 55% on the excess funds on retirement.
- No requirement to purchase an annuity or Alternatively Secured Pension (ASP)
Members of UK-registered pension schemes can currently defer taking their pension until they reach age 75. However, once the member turns 75, they must either buy an annuity to provide an income for life, or opt to take an ASP. Transferring to a QROPS may allow the member to continue to defer taking a pension beyond age 75.
- Ability to leave fund to heirs
UK pensions legislation significantly restricts the member's ability to leave the pension fund to their heirs on death. Depending on the rules applicable in the expatriate's country of residence, transferring the UK pension to a QROPS may allow the member to leave lump sums without deduction of tax to heirs.
- No liability to UK tax on pension income
A non-UK resident drawing a UK pension remains subject to UK tax on the income, unless he or she resides in a country with a double tax treaty with the UK that contains an article on pensions. Transfer to a QROPS ensures that, if tax is due on pension income, it will only be taxable in the country of residence.
A UK pension will usually only pay in sterling, which means the member runs an exchange rate risk in respect of pension income, in addition to incurring currency conversion charges. Transferring to a QROPS means that the pension payments can be made in the local currency, thus eliminating exchange rate risk.
- Investment freedom
A QROPS may give access to investment links that are currently not available to a UK-registered scheme. The most obvious example is a direct holding in residential property.
Next month, I will look at some of the potential pitfalls of QROPS.
- Brendan Harper is technical services manager at Friends Provident International.
What is a QROPS?
1. The scheme must be established outside the UK and
2. must be regulated as a pension scheme in a country or territory in which it is established. If there is no body to regulate it, the scheme must be either:
i. established in an EEA member state, or
ii. the scheme's rules must provide that at least 70% of the UK tax-relieved funds will be used to provide a pension for life from the member's normal minimum retirement age, and
iii. must be 'recognised for tax purposes' in the country or territory in which it is established. This means it must be:
a) open to residents of the territory, and
b) established in a country or territory where there is taxation of personal income from which relief is not available in respect of the contributions made to pension schemes, or all or most of the benefits are subject to taxation, or the scheme itself is subject to taxation on its income and gains and is a complying superannuation plan as defined in section 995-1 of the Income Tax Assessment Act 1997 of Australia, and
c) approved, recognised, or registered by the relevant tax authorities, or if there is no system for this, it must be able to pass the '70% rule' above.
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