Have you ever worked in the UK? Did you have any sort of pension arrangement?…
Whether someone has been an expat for 10 years or 10 months, they likely have come across the word QROPS (pronounced kyew-rohps) at least once or twice. Similar to the Japanese words that may not have a direct translation to our native language (ganbaru, genki, otsukaresama, etc…), QROPS is one of those words that may be familiar to expats and it breaks down into the following components…
QROPS has been around for less than 10 years, and its birth and history can be traced back to the establishment of the European Union, and the relevant inter-government legislation that followed. One of the strongest points of establishing the European Union was to allow the free flow of goods and services between the member countries. Along with goods and services, the UK government decided that individuals moving out of the UK should be able to take their pensions with them as well. This is where QROPS was born, and individuals (even if they are not UK citizens) became allowed to take their pensions with them when they left the UK.
This alone was a monumental piece of legislation; however, it included an additional bit of detail that most people didn’t even notice for many years…
1. Individuals are not required to transfer their UK pension to an EU member state.
2. Additionally, it does not have to be transferred to the new country where the individual lives. It can be transferred to anywhere in the world.
This opens an individual up to a great deal of freedom and flexibility with regard to what they decide to do with their pensions savings.
This has led to thousands of expats transferring their old UK pensions into a number of different types of QROPS arrangements. According to the Concept Group, a Guernsey pension scheme administrator, by 2010 expats had transferred over £1.3 Billion (with a B) worth of pensions. In the following 5 years, it is estimated that number has already doubled…
Here are some more quick facts relating to QROPS and expats:
That said, it is important to recognize that the QROPS is not a simple fix-all solution, and there are certainly cases whereby it makes better sense for the individual not to transfer out their pension. For example, the UK government has recently increased the cash-withdraw flexibility of normal pensions, allowing for practically unlimited withdrawal of funds (well, so long as they pay UK tax on it…), which brings UK pensions up to a similar level as a QROPS regarding liquidity.
However, there are still many strong reasons for people not planning to return to the UK to set up a QROPS. For example, you would have access to a much higher level of annual income through drawdown abroad than in the UK, and funds within a QROPS would not be subject to any death taxes, leaving a larger pot of cash to your heirs (though there is the possibility of inheritance taxes in your country of residence). You also would likely have a much wider access to investment options within a QROPS than within a traditional UK pension…
Ultimately, with the topic of pensions transfers and their applications to individuals and their personal circumstances, it is important to work with a knowledgeable advisor that has the expertise to be able to when it’s a good idea to set up a QROPS, and when it’s not a good idea.
Examples of when to QROPS
While each individual will have their own unique circumstances, we have put together a few example scenarios whereby a financial advisor may recommend considering a pension transfer into a QROPS:
- When the individual’s UK pension is considerably large. To simplify the matter: the larger the existing pension, the larger the benefits an individual stands to receive. From here it is a simple calculation of whether the benefits outweigh the costs. In the past this required around £200k, but as the costs of QROPS structures have come down, a pension transfer is worth considering as long as it is at least 20,000 GBP in size.
- When inheritance tax planning is a consideration. For example, upon death a UK pension would pass to the parents’ heirs (for example, children), and be subject to a tax liability of up to 55% (whereas the UK does not levy any death tax on QROPS…)
- Whereby the individual would like a larger tax-free cash one-off from initial drawdown. A UK pension allows an individual to take 25% of the total pension amount as a cash drawdown upon the commencement of benefits payments (age 55). However, a QROPS is able to take 30% tax free cash from the total pension amount (As long as they have been living overseas for at least 5 years. They may be subject to tax in their new country of residence, though of course that can also be planned for…).
- When the individual may be concerned about market or currency fluctuations. UK pension schemes are denominated in GBP, and benefits are paid out in GBP. A QROPS can spread risk across different currencies and markets in different geographic regions.
Examples of when maybe not to QROPS
- If the pension amount is relatively small (20,000 GBP or less). Unfortunately in this scenario it might be a bit of a squeeze trying to break even on transfer costs
- If there is a strong possibility of returning to the UK. While a QROPS would benefit from more geographically diverse investment choice and flexibility, some of the most basic benefits of a QROPS strategy stem from an individual’s expat status, which would not apply if they decide to reside permanently in the UK.
- If the individual happens to have a Defined Benefits Scheme with benefits that are exceptionally good, whereby it might be sense to keep the benefits intact rather than crystallizing them into a Defined Contribution Scheme (as is the case with QROPS)
As mentioned, pensions can get pretty complicated, and a simple internet article couldn’t possibly contain all the answers. If you have a UK pension, the best next step would be to speak with an advisor to help ascertain if a QROPS pension transfer is a good fit for your individual circumstances, and which type of QROPS is best…
Important Technical Note: As of 1st July 2015, HMRC drastically reduced the number of authorized QROPS structures, cutting out thousands of plans that were deemed unsuitable to the purposes and justifications for QROPS (HMRC have provided written confirmation this will not affect existing members, but only prevent new subscriptions to de-listed QROPS: PTM112500). This was to be expected, as the purpose of a pension is to provide income in old age, and HMRC deemed inappropriate such plans that appeared to be structured solely for the purpose of withdrawing large amounts of tax-free cash before age 55 (benefits age).
Have you ever worked in the UK?
HMRC – Legal Definition of QROPS http://www.hmrc.gov.uk/manuals/ptmanual/ptm112300.htm
HMRC – List of Recognized Schemes https://www.gov.uk/government/publications/list-of-qualifying-recognised-overseas-pension-schemes-qrops/list-of-recognised-overseas-pension-schemes-notifications
Office for National Statistics – (ONS) http://www.ons.gov.uk/