10 Questions to ask before you transfer to a QROPS
Considering a QROPS transfer? Ask your adviser these important questions. Don’t be shy in grilling a financial adviser. It’s their job to ensure you understand their proposals and why (and if!) you should make any changes to your retirement plan.
1. Is it a Recognised overseas pension scheme?
QROPS stands for Qualifying Recognised Overseas Pension Scheme. QROPS were designed to allow individuals to transfer pension funds without penalty, while retaining a lot of the flexibility and functionality of UK pensions. A UK pension fund should only be transferred overseas to a pension which is recognised by Her Majesty’s Revenue and Customs (HMRC).
Check that the QROPS is listed on the HMRC website before considering a transfer.
Large penalties apply when UK pension funds are not treated correctly. Your pension money could be liable to a unauthorised payments charge if the transfer is ‘not recognised’. A penalty of up to 40% could be applied to your pension money if the new plan does not meet HMRC’s standards.
2. Will my residence trigger the Overseas Transfer Charge?
The Overseas Transfer Charge (OTC) was introduced to stop the misuse of QROPS in UK tax avoidance. Those holding QROPS for the right reasons, to take their pension funds outside of the UK for genuine planning purposes, should not be affected by the OTC. The OTC is an income tax charge of 25% of the value of pension funds being transferred.
The Overseas Transfer Charge will apply if NONE of the following conditions are met:
- The member is resident in the same country as that in which the QROPS receiving the transfer is established
- The receiving QROPS is established within the European Economic Area (EEA) or Gibraltar where the member is UK resident, or resident in a country within the EEA or Gibraltar. This means that, for example, a Malta QROPS would NOT trigger a tax charge for any resident of the EEA or UK.
- The QROPS is set up by an international organisation for the purpose of providing benefits for, or in respect of, past service as an employee of the organisation and the member is an employee of that international organisation. There are further notes here.
- Where the QROPS is an overseas public service pension scheme and the member is an employee and active scheme member.
- The QROPS is an employer-provided occupational pension scheme and the member is an employee with active scheme membership.
A transfer from one QROPS to another may also be subject to the Overseas Transfer Charge in similar circumstances to the above.
More information about the QROPS tax regime can be found online.
3. What if I move residence in the next 5 years?
If a transfer was not subject to the Overseas Transfer Charge when it was made, it can still become subject to tax if circumstances change within the ‘relevant period’. This means, if you open an EU-based QROPS after 2017, and move residence to live outside of the EEA within 5 years, you may be subject to OTC tax.
If you’re moving home within the 5 year observation period, seek advice as there are alternative planning options available.
This rule affects only transfers to QROPS that were made after the introduction of the OTC.
4. Is the QROPS better for me than a UK pension?
UK pensions are highly regulated and protected. Private pensions in the UK such as the SIPP can offer benefits to expatriates. i-SIPPs are specifically designed for the international market. i-SIPPs can offer multiple currency accounts, investments and income drawings and be flexible to changing residence, tax circumstances and international banking.
A QROPS doesn’t offer the same flexible planning benefits and tax exposure opportunities as a SIPP, and can be more expensive. While the QROPS allows you to take money outside of the UK, it should be at least as good, if not better, for your personal financial plan to be worthwhile.
5. Where is the QROPS based and how is it regulated?
A pension is typically the biggest asset in anyone’s financial portfolio. It is lifetime savings to provide lifetime income. Don’t take any risks with your pension funds. Regulation protects pension members. Having the right to complain if the advice you received was not appropriate is hugely important.
The QROPS must be the most suitable pension arrangement to fit your plans & tax residence.
Check the regulatory environment of your QROPS and be confident in the local pension regulator overseeing it before moving money. The QROPS regulator may be different to the regulator for your financial adviser. Check how both your pension money and pension advice is protected.
6. Where and how will my pension funds be invested?
The QROPS is just a pension ‘wrapper’. A QROPS is the legal entity in which pension funds sit. The QROPS will receive your transferred pension funds in cash, and from there funds are invested. The success of a QROPS plan is not just getting the right pension ‘wrapper’ but also the appropriate investment of pension money.
Before making any investment decisions, perform some investment analysis online with these top tools. Consider your risk profile and only take regulated investment advice. Check the historic returns of any recommended portfolio, their management, costs and the risk approach.
7. How much tax will be due on withdrawals?
QROPS are not tax free. We have too much experience in giving second opinions to QROPS members who’ve been misled over the ‘tax planning benefits’. A QROPS withdrawal is subject to taxation both where it is based and where you live. In most cases, though, there is a tax agreement in place meaning you are only taxed once.
Most QROPS pay out income ‘gross’, that means ‘before tax’. As with any income received, this is subject to reporting under your local tax law. It is your responsibility to report and settle any taxes due.
While a QROPS provider may help you with basic guidance and information, they are not responsible for settling and reporting on your income taxes. With cross-border transparency increasing across all financial products and holdings, it is important to get your taxes right!
8. Is the lump sum taxable where I live?
In some countries, QROPS lump sums are subject to tax, too. Before considering a QROPS, understand how it is treated for tax. You will probably need to declare QROPS income in your tax return, and in some jurisdictions, your Pension Commencement Lump Sum (PCLS) is also reportable.
While considering tax, check local death tax laws. Some consider the QROPS to be tax free on death, but liability to death tax could be affected by where you live and your deemed domicile.
9. Will the Benefit Crystallisation Event (BCE) be beneficial or harmful to my planning?
A transfer to a QROPS is a BCE 8. Without getting too technical, that means a UK pension transfer to a QROPS is a ‘test’ for the UK pension lifetime allowance. Funds in excess of the UK lifetime allowance could be subject to tax of 25% when transferring to a QROPS.
The lifetime allowance charge is totally independent of the OTC. That means, without careful planning, you could pay both, with one not even reducing liability to the other! Those with very large funds can benefit from a QROPS BCE, but planning must be carefully considered. As part of a QROPS, HMRC conduct various tests and ask for a number of forms to be completed. However, only deal directly with pension providers when applying and deducted appropriate taxation.
10. How much will it cost?
Most QROPS operate under a fixed charging structure. Annual fees for QROPS can be tiered by fund size, but are rarely percentage based. Percentage-based charging better suits smaller pots (under £100,000).
QROPS fixed-fees can usually be selected in a currency to best suit your pension funds and planning.
The set up of a QROPS plan involves a number of stages of paperwork. While you may expect to pay around £1,000 – £2,000 to set up the QROPS, further costs will apply for planning advice and investment portfolio management.
Most modern QROPS now cost between £800 and £1,500 per annum on an ongoing basis. Costs are usually higher when in the ‘drawdown’ stage, where more account adjustments, investment switches, cash movements and income distributions are administered.
Take regulated QROPS advice
Before making any changes to your pension savings, ensure you get regulated advice. It is important to ask the right questions before transferring pension funds. Do not take risks with your lifetime savings. Retirement might seem like ages away, but protecting your pension should be paramount to your planning. Ask your adviser our key QROPS transfer questions!
Your pension funds must provide you with a passive income for the rest of your life. While a good term to retirement means you may be able to suffer some investment performance volatility, it does not mean you should take major planning adjustments without due care. We can connect you to a regulated and insured financial adviser where you live.
Our adviser panel consists only of firms who are qualified and regulated for cross-border pension advice. All of our linked advisers offer a free initial consultation. During that meeting, you can ask any QROPS transfer questions you have. Make sure of an expert’s time before agreeing to any costs! We can connect you with a trustworthy firm with experience in advising QROPS members, and those thinking about whether a QROPS could better suit them.
