Josh Croft, technical consultant, AJ Bell, looks at what paraplanners need to know about QROPS, pension wrappers intended for UK citizens moving permanently overseas – and what happens if an individual later decides to return to the UK.
The Qualifying Recognised Overseas Pension Scheme (QROPS) regime was first introduced in the A-day changes in April 2006. A QROPS is a pension scheme established outside the UK that is broadly comparable to a UK registered pension scheme. A recognised transfer can be made to a QROPS in the same way as to a registered UK pension scheme.
The policy intention was to allow people who permanently leave the UK to simplify their affairs by taking their pension savings with them to their new country of residence to enable them to continue to save to provide an income when they retire.
In order to be a QROPS, a scheme must not be a UK registered pension scheme and meet a number of requirements. One of these is that it must be a recognised overseas pension scheme (ROPS).
There are four tests the overseas scheme manager must evidence to show the scheme meets the requirements of a ROPS.
- The regulatory requirement test – this aims to identify a regulator in the other country that oversees legislation that impacts on the operation of the pension scheme, to ensure that pension schemes are administered correctly to protect members’ interests.
- 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 territory in which it is established.
- 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.
To be a QROPS, the scheme manager must confirm the scheme meets the conditions 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 provide a reference number to the scheme. Inclusion on the list does not mean the scheme is approved by HMRC, nor that it is automatically a qualifying scheme (QROPS).
The overseas transfer charge
Initially if a transfer was made from a UK registered pension scheme to a QROPS then the transaction would have been free of tax (provided it does not exceed the individual’s lifetime allowance). However, the Budget on 9 March 2017 introduced the overseas transfer charge (OTC) which aimed to prevent transfers to a QROPS purely for tax-planning purposes.
The OTC applies a 25% tax charge on transfers to QROPS if none of the exclusion conditions are met. The rules mean that where a member is transferring their pension to a country they are not resident in the OTC will apply, unless it is their employer’s scheme or both the pension and the member are in an EEA country (although they don’t have to be in the same EEA country). Following the UK leaving the EU (and the EEA) the residency condition was updated so that the charge will not apply provided the member is resident in either the UK or in a country within the EEA and the QROPS is established in a country within the EEA.
QROPS and the Lifetime allowance
As a transfer to a QROPS means the funds leave the UK tax system the transfer is classed as a benefit crystallisation event (BCE8) for lifetime allowance purposes. If the amount transferred is more than the member’s available lifetime allowance the excess will be liable to the lifetime allowance charge. The amount in excess of the lifetime allowance will be treated as a retained amount and subject to a lifetime allowance excess tax charge of 25 per cent. This will be deducted from the transfer value and paid to HMRC by the transferring scheme.
If the transfer is also subject to the OTC, the lifetime allowance charge takes priority. The amount crystallised through BCE8 will be the value before deduction of the OTC. The OTC will be calculated on the actual amount transferred after deduction of the lifetime allowance charge.
Returning to the UK
It is possible to transfer from an overseas scheme to a UK registered pension scheme, though technically not treated as recognised transfers, they are treated in a similar way. Although it is possible schemes and providers may not offer this as an option due to possible complications of how overseas tax authorities would treat the payment.
Funds that are moved back to the UK pension system will be tested against the LTA in the usual way when benefits are crystalised. However, members can claim a lifetime allowance enhancement factor which will increase their available LTA based on the amount transferred from the overseas scheme.
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