This article looks to answer some of the key questions surrounding what a QROPS is and the rules applying to the way such schemes operate.
What is a Qualifying Recognised Overseas Pension Scheme (QROPS)?
There are many stipulations that must be met to be a QROPS, but essentially it must be a pension which is authorised and regulated within the country of origin and must have made an undertaking to HM Revenue & Customs (HMRC) to comply with the UK regulations relating to overseas pension schemes. Once authorised, HMRC can withdraw the QROPS status from the scheme if it fails to comply with the rules it had agreed to adhere to.
What is a Recognised Overseas Pension Scheme (ROPS)?
A ROPS is a scheme that is authorised and regulated within the country of origin. It is possible for an individual to be a member of a ROPS due to it having received one or more of the following:
- migrant member relief contributions (this applies where relief from UK income tax has been provided on contributions made to an overseas pension scheme where an individual has come to the UK as an existing member of that scheme if certain conditions are met)
- tax relieved contributions under double taxation agreements
- any post A-Day membership of an overseas scheme providing benefits from employer contributions where the member has been exempt from tax on the benefits provided (this could be an overseas employer operating a recognised overseas scheme or even a UK employer doing the same).
A ROPS does not need to be a QROPS to have accrued rights from one of these sources; these are called relevant non-UK schemes, meaning overseas schemes under which contributions have benefited from UK tax relief. If a person has received UK tax relief on some or all of their funds, they are termed as ‘UK tax (or just) relieved members’. It is possible for a scheme to hold benefits that have been accumulated using one of these methods, which is a ROPS as well as holding the QROPS status.
Where can you find out which schemes are QROPS in various countries?
HMRC publishes a list of schemes which are QROPS, together with their country of establishment (see hmrc.gov.uk/pensionschemes/qrops). Some schemes may choose not to feature on this list, but they can be checked with HMRC if not stated, where the QROPS has given the scheme authority to do so.
Each QROPS will be given a certificate to show the scheme status, the validity of which can be verified by contacting HMRC directly. Before making a transfer overseas, a UK-registered pension scheme should verify that the QROPS status is valid by asking to see the certificate, then looking online and/or calling HMRC.
If made in error to a non-QROPS pension, an unauthorised payment would occur which would be subject to the member unauthorised payment charge, the member unauthorised payment surcharge (if more than 25% of the fund is made as an unauthorised payment) and the scheme sanction charge.
A scheme may be excluded from being a QROPS if HMRC decides that there has been a significant failure to comply with any information requirements. In future no further transfers from registered pension schemes can be made to the QROPS if this occurs. Also, if HMRC has discovered that a scheme was not eligible to be a QROPS originally and this was granted in error, the approval can be reversed.
If a scheme administrator has made a transfer in good faith based on the fact that the overseas scheme is included on the latest published QROPS list when making a transfer to it, this should provide reasonable grounds for HMRC to not apply their liability to the scheme sanction charge if the scheme is subsequently withdrawn from the list by HMRC, but this is on the basis that the administrator is expected to have carried out reasonable checks.
Before making an overseas transfer the administrator should have checked the published QROPS list, and in particular must have done so no more than one day before the transfer was made. It is, therefore, a prudent approach for the scheme administrator to verify this with a copy of the approval certificate and by telephoning HMRC to confirm the status as current.
How are QROPS structured?
The local jurisdiction will set out how the local pension scheme is structured, however, many QROPS follow a similar structure:
- There is a master trust set up which appoints a corporate trustee (the QROPS provider) and their powers, roles and responsibilities in terms of administering the QROPS.
- The trustee must be based outside the UK for the scheme to be considered as a QROPS.
- There are usually wide investment powers allowing flexibility for the trustee to invest in a wide range of assets – for example cash, bond, property, hedge, equity and commodity funds.
- The trustee of the QROPS holds these investments on the member’s behalf and has investment powers. They will often appoint an investment manager to switch investments on their behalf as market conditions change.
- The trustee would also be responsible for making payments of benefits from the QROPS to the member.
What is a relevant transfer to a QROPS?
The transfer of a member's benefits in a registered pension scheme to an overseas scheme that is established outside the UK and not registered in the UK may be a recognised transfer if the receiving scheme is a QROPS.
A transfer to a QROPS will be a benefit crystallisation event (BCE) specifically classed as BCE 8. This means that the transferring funds will be tested against the lifetime allowance, with a 25% tax charge on any excess benefits.
Where a transfer is made to a QROPS and the member has reached the normal minimum pension age (age 55 since 6 April 2010), any part of the transfer payment that generates a chargeable amount, ie above the individual’s lifetime allowance, may be paid as a lifetime allowance excess lump sum. The amount representing the member’s available lifetime allowance will be transferred overseas to the QROPS and will crystallise through BCE 8. The rest of the intended transfer payment above the individual’s lifetime allowance may be paid to the individual under BCE 6, as a lifetime allowance excess lump sum subject to a 55% tax charge which is deducted by the scheme before paying the lifetime allowance excess lump sum to the member.
If a person is under the normal minimum pension age at the time a transfer to a QROPS is made, a lifetime allowance excess lump sum cannot be paid. The full transfer amount will crystallise through BCE 8, with any excess benefits subject to the 25% lifetime allowance excess charge.
If enhanced or primary protection, or both, apply, these can be maintained. Enhanced protection stipulates certain restrictions in order for the transaction to be a ‘permitted transfer’, but if complied with the status would not be jeopardised. If enhanced protection were to be lost and primary protection also applies, then this would remain in force after the transfer to the QROPS.
Can Guaranteed Minimum Pension (GMP) or Section 9(2B) rights be transferred to a QROPS?
GMP and Section 9(2B) right benefits can be transferred to a QROPS providing the member consents in writing and acknowledges that the transfer is made at their own risk. There are also certain requirements that the receiving scheme must satisfy and comply with. These are more detailed for the transfer of GMP.
The National Insurance contributions office (NICO) form CA1890 must be completed and signed by both the member and the transferring scheme.
Where GMP is held in a Section 32, the provider might not permit a transfer to QROPS where, due to underlying investment conditions, there is insufficient value within the Section 32 to cover the GMP liability.
Can former protected rights in a Money Purchase Scheme be transferred to a QROPS?
Protected rights in Money Purchase Schemes ceased to exist from 6 April 2012, they are now treated the same as any other accrued benefits. Therefore, they do not have any specific requirements attached to them and can transfer to a QROPS in the same way as other UK registered pension scheme funds.
When can UK pension rights be transferred outside the UK into a QROPS?
They can be transferred either before the individual commences benefits or once they have come into payment. It is unlikely, however, that the provider of a final salary scheme would permit a transfer once the pension is in payment.
It is worth noting that an individual can transfer an annuity overseas, however, the annuity can only be transferred to a European Economic Area (EEA) insurance company.
What is the minimum transfer that can be made into a QROPS?
There is no minimum level according to the regulations, but individual QROPS may set a minimum requirement.
Additionally, transferring small pension schemes into a QROPS may not be cost efficient.
Why might an individual want a QROPS?
An individual leaving the UK may need more pension flexibility and with a QROPS they can benefit from:
- The pension laws of the jurisdiction in which the QROPS provider is based.
- Possible lump sum flexibility.
- Some protection from currency conversion fluctuations as most QROPS can accept contributions and make payments in more than one currency.
- The registered pension scheme regulations will cease to apply once they have been resident outside of the country for more than five tax years. The pension will then be subject to the rules and tax treatment in the country of establishment.
What benefits within a QROPS are subject to UK legislation?
The benefits which remain under HMRC rules are called the ‘relevant transfer fund’. QROPS managers have to report all payments made out of a relevant transfer fund, for a period of 10 years from the transfer of those funds into the QROPS, to HMRC. This includes transfers in from a Recognised Non-UK Scheme in the definition of the relevant transfer fund. Payments include transfers of assets and any other transfer of money's worth. It is only after the 10th anniversary of the transfer that a QROPS manager will need to check whether a member has been a UK resident in one of the last five tax years. If the member has been a UK resident in one of the last five tax years then the reporting requirement will still apply.
This consists of transfer funds received at a time when the scheme was a QROPS from registered pension schemes and relevant non-UK schemes (broadly meaning QROPS and overseas schemes under which contributions have benefited from UK tax relief).
The relevant transfer fund excludes investment growth under the QROPS, because this would not have benefited from UK tax relief. The member payment provisions only apply to payments made (or treated as made) from the part of the pension which has received tax relief; they are not applicable to benefits accrued without UK tax relief.
Provisions are laid for member payment charges to apply to transfer members of such schemes, in the same way as payments made (or treated as made) to or in respect of a registered pension scheme member. These are set out in schedule 34 of the Finance Act 2004. The charges covered are the unauthorised payment charge/surcharge, short service refund lump sum charge, special lump sum death benefit charge, and trivial commutation and winding up lump sum charges both for the member and when paid as death benefits (where appropriate).
If a local tax charge applies to the same member payment in the country in which the QROPS is based, any liability under the member payment charges due to HMRC is reduced by the amount of tax imposed by the rules of that country. If after the UK tax has been paid it is found that there is a tax to be paid in the resident country, this is either offset against the individual’s UK liability or a refund is made. For example, a member becomes liable to an unauthorised payments charge of £50,000 due to an unauthorised payment from a QROPS and this payment also results in a £10,000 local tax charge in the QROPS country of origin.
Assuming there is no other UK tax due for this to be offset against, it would reduce the £50,000 liability down to £40,000.
What investments may be subject to charges within the relevant funds of a QROPS?
The same restrictions apply as to UK-registered pension schemes. The definition of taxable property follows the UK rules too. This consists of residential property and most tangible moveable assets. Residential property can be in the UK or elsewhere and is a building or structure, including associated land, that is used or suitable for use as a dwelling. Tangible moveable property covers things that you can touch and move. It includes assets such as art, antiques, jewellery, fine wine, classic cars and yachts.
Broadly, the taxable property unauthorised payment charge applies to the extent that a taxable investment which is treated as a payment to the member is referable to their UK tax relieved portion of the fund. This applies in a QROPS where the member is able to control (whether directly or indirectly) where the assets are invested.
When the UK tax relieved fund is reduced by payments out to and/or in respect of the member, but not below zero, then there is a set order of which parts of the relevant transfer-in fund the unauthorised payment(s) are attributed to first.
The taxable property unauthorised payment charge is not a member payment charge under schedule 34 of the Finance Act 2004. It applies regardless of whether or not a transfer member has been non-resident for more than five tax years.
How does the lifetime allowance apply to UK tax relieved benefits within a QROPS?
The lifetime allowance charge applies to UK transfer-in members of a QROPS. A transfer from a UK tax relieved pension scheme to a QROPS will have already been treated as a BCE 8.
Amounts that have been deemed to be crystallised under BCE 8 are permitted to be excluded, for the purpose of calculating the available lifetime allowance (LTA) when certain lump sums are paid.
This covers the calculations for pension commencement lump sums, serious ill health lump sums, short service refund lump sums, trivial commutation or a winding up lump sum payments due to be paid to the member from the QROPS. For example, for a serious ill health lump sum, the amount crystallised via a BCE 8 will be disregarded when determining whether or not the member has used up all of their LTA at the point the payment is made.
When an LTA excess charge arises as the result of a benefit crystallisation event for any untested UK tax relieved funds within a QROPS (ie accrued by an alternative method to a transfer in from a UK-registered pension scheme, for example, migrant member relief contributions or tax relieved contributions under double taxation agreements as mentioned under ‘What is a Recognised Overseas Pension Scheme (ROPS)?’), this is not the responsibility of the scheme administrator. Therefore, the liability to the charge of either 25% or 55%, as applicable, falls on the relieved member only.
Where a QROPS has received a transfer from a relieved non-UK pension scheme that was not a benefit crystallisation event because it was a block transfer (see ‘What happens if the relevant benefits within a QROPS are transferred out?’ below), the LTA applies to the recipient scheme. The transferred fund is treated as the relevant relieved amount, or part of the relevant relieved amount if the recipient scheme already held any UK tax relieved funds. Any untested relevant relieved amount will be checked against the LTA at a subsequent benefit crystallisation event.
This applies even if the recipient QROPS was not a relieved non-UK pension scheme itself, ie had not accrued benefits subject to relief from UK tax after 5 April 2006. Also, a member is treated as a relieved member, even though they may not have accrued benefits subject to relief from UK tax after 5 April 2006 in the new scheme, but instead had built them up in the ceding scheme only. This treatment means that the LTA provisions will continue to apply on the same basis to the new scheme as they did to the previous relieved non-UK pension scheme.
A block transfer is a transfer of all of the individual's sums and assets in the relieved non-UK pension scheme in one transaction, together with all of the sums and assets of at least one other member of the transferring scheme. All of those individuals' sums and assets must be transferred to one scheme.
For example, a ROPS has 10 members who have UK tax relieved funds because of migrant member relief contributions. If two of them transferred all of their benefits to a new QROPS at the same time, this would be a block transfer. As such their benefits would not be tested against the LTA at that point.
The LTA charge will not be exempted or overridden by any of the UK's double taxation arrangements. That is because it is not a charge on income and so does not come within the remit of double taxation agreements.
What restrictions apply to benefits within a QROPS that is subject to UK legislation, due to UK residency within the past five tax years?
Benefits taken must comply with UK pension legislation subject to slight easements. For example, within the QROPS approval agreement up to 30% may be paid as a tax-free lump sum from a scheme with the residual 70% to be used to secure an income, whereas a registered pension scheme is limited to 25%. Therefore, any benefits paid from the relevant transfer fund within five tax years of being a UK resident must follow this rule, with the residual 75% providing a related pension benefit, instead of 70% which the scheme might otherwise have permitted. When paid, benefits relating to the relevant transfer fund will not be a benefit crystallisation event, but must be notified to HMRC. Where payments are made in excess of UK registered pension scheme limits, an unauthorised payment charge may apply.
Another example could be if benefits were paid to a member of a QROPS before the normal minimum pension age. The payment of a pension before the age of 55 after 5 April 2010 could give rise to an unauthorised payment charge. It would be an unauthorised payment if it were made from a registered pension scheme.
To determine whether or not it was an unauthorised payment all of the provisions that apply to registered pension schemes would need to be taken into account, including any transitional protection in place. So an unauthorised payment charge would not apply to a member of a QROPS who block transferred their benefits into the plan and the original scheme gave them the right to receive benefits at the age of 50, because they had on 10 December 2003 a right under the scheme's rules to retire at that age. The entitlement to the early retirement age would be maintained within the recipient QROPS.
An example of how this might work in practice
Benefits taken in 2013 when the value of the QROPS has increased to £150,000 (no other transfers or UK relieved contributions received). Original transfer of £100,000 from a UK registered pension scheme received.
The member has been resident within the UK in the preceding five years. The total lump sum payable can be calculated as follows:
UK tax relieved pension commencement lump sum from the transfer funds will equate to: £100,000 at 25% = £25,000.
The additional £50,000 growth will be subject to the local jurisdiction rules.
So, for example, if the QROPS rules allowed the lump sum to be calculated at 25% of the fund value then: £150,000 at 25% = £37,500 (lump sum allowable under local rules). Then a maximum of £37,500 can be paid to the member.
In this example, £25,000 is being paid under the UK rules, therefore a further £12,500 can be paid under the local rules. This additional £12,500 is not subject to the UK member payment provisions, nor will it incur any unauthorised payment charge.
What would the situation have been had the member been non-resident for more than five years?
Using the same details in the example above, and assuming to meet the QROPS requirements the scheme has to provide that 70% of the transfer funds will provide an income for life, the maximum pension commencement lump sum from the transfer funds will equate to:
£100,000 at 30% = £30,000
The additional £50,000 growth from the scheme will be subject to the rules in the jurisdiction, but the residual of the transfer fund after pension commencement lump sum (ie £70,000) can’t provide further cash lump sums without jeopardising the status of the QROPS.
If there are funds in a QROPS which have not received UK tax relief, how does this impact the 30/70 split?
If no UK tax relief was received on contributions made to the QROPS whilst being a non-UK tax resident, for example, then they would not form part of the member’s UK tax relieved scheme funds and therefore would not be subject to the 30/70 split. Any growth on the transferred funds will also not be included in the 30/70 split.
It is a requirement of the QROPS rules (relating to member payments from transferred funds) that a QROPS must keep a record of the amount of the member's transfer fund.
Is there a specific order that benefits are treated as being paid from a QROPS holding UK tax relieved funds?
Any payments made by the QROPS will be treated as coming out of the UK relieved funds in priority to any other funds within the scheme.
For example, an individual is a member of a QROPS which has received a transfer from a registered pension scheme. The relevant transfer fund under the QROPS is £200,000. The member had other pension rights (that are not member's UK tax relieved funds) under the QROPS of £300,000. The individual is subject to the member payment provisions. The rules of the local jurisdiction allow the member to take 25% tax-free cash. The member decides to use £200,000 of the QROPS fund to provide pension benefits. 25% is taken as a lump sum (£50,000), and the remainder (£150,000) is used to provide pension income for life.
The member's UK tax relieved fund has been used to pay the lump sum and the remainder used to provide the income for life. There is no longer a relevant transfer fund within the QROPS, so the residual uncrystallised rights in the QROPS (£300,000) do not relate to the member's UK tax relieved funds and could be paid in accordance with local jurisdictional rules. No further reporting requirements or potential member unauthorised payment charges will apply to them.
Does QROPS reporting cease after a UK member has been absent from the UK for more than five full tax years?
A payment (or a deemed payment) will need to be reported if it occurs within 10 years of the original transfer in from a UK registered pension scheme or a Recognised Non-UK Scheme. If the initial 10 years have passed, a payment (or a deemed payment) will not have to be reported to HMRC by a QROPS if the member is not tax resident in the UK when the payment is made and has neither been UK resident in that tax year, nor in any of the previous five tax years.
However, a QROPS will need to check on the position when a payment is made more than 10 years after the UK registered pension scheme or Recognised Non-UK Scheme was received, as the member could have become UK resident again after a period of non-residence, in which case the payment must be reported.
Until that full five tax year cut-off date or if the member is UK resident at the time of payment, the QROPS trustee is obliged to let HMRC know about any payments or transfers made from the individual’s account.
What happens if a member returns to the UK before having taken the benefits?
The member is required to inform the QROPS that they have returned to the UK. If the member then transfers their funds, or takes benefits from the QROPS, the scheme has to report the payment to HMRC regardless of how long the member was non-UK resident previously. Failure by the scheme to report the payment may result in their QROPS status being removed.
If HMRC removes a scheme’s QROPS status, what does this mean for the member?
Where a UK resident member has already transferred to a QROPS and HMRC subsequently rescinds the QROPS status, the member will not be subject to an HMRC tax charge as a result of this action.
However, the scheme member will in future be responsible for reporting any payments that the scheme makes to them while they are UK resident or were non-UK resident for less than five complete tax years from the date of payment.
If the payment is unauthorised then an unauthorised payment charge will be payable.
HMRC has stripped all Singapore-based QROPS of their approved status, because Singaporean pension scheme rules did not fit with HMRC requirements for QROPS. HMRC has been adamant that it will take action ‘against any abuse it finds’.
The latest schemes to lose their QROPS status have been a significant number of Guernsey based QROPSs. When legislative amendments came into force from 6/4/2012, pension schemes where non-residents have a relief that is not available to residents of the country in which the scheme is established will also no longer meet the QROPS conditions.
If HMRC removes a scheme’s QROPS status, can the member transfer to another QROPS provider?
Yes, if the transfer was made to the scheme when it was still authorised as a QROPS. That provider has to ensure they are able to ascertain which contributions are UK tax relieved as a condition of accepting the transfer. Where all contributions made to the now unauthorised scheme were made before their QROPS status was removed then the scheme member will not incur an unauthorised payment charge when a transfer to a new QROPS is made.
What is the inheritance tax position on a QROPS?
Amendments made to the Inheritance Tax Act 1984 (IHTA) by the Finance Act 2008 restored inheritance tax (IHT) protection to UK tax relieved pension savings held in overseas pension schemes so that these savings will be provided with the same IHT protection as is available to funds held in UK registered pension schemes. The overseas scheme will have to be a ‘qualifying non-UK pension scheme’ which is defined in IHTA s.271A as inserted by the Finance Act 2008. This definition requires the scheme to have been established outside the UK and to meet the requirements set out in regulations.
Can a UK court make an earmarking or pension sharing order on divorce over a QROPS?
Rights under overseas pension schemes are out of the earmarking or pension sharing jurisdiction of the UK courts. Additionally, local jurisdictions may also have prohibitions against court interference in pension rights.
What are the potential implications of transferring untested UK funds out of a QROPS?
Normally a transfer from a QROPS to another QROPS would be a BCE 8 for any untested UK tax relieved funds within it (ie accrued by an alternative method to a transfer in from a UK registered pension scheme).
However, a transfer from a QROPS of the rights of a relieved member or a transfer member to a scheme that is neither a UK registered pension scheme nor a QROPS will be an unauthorised payment. It will create a member payment charge unless the individual meets the non-resident for five years condition when the transfer is made.
If a transfer of sums or assets to a QROPS by a relieved member from a relieved QROPS is part of a block transfer, it will not be classed as a BCE 8 for any untested UK tax relieved funds within it.
After the transfer the receiving scheme is treated as a relieved non-UK pension scheme, even where that scheme has not met the definition previously, providing the receiving scheme is a QROPS. The member is treated as a relieved member and the amount transferred is treated as their relevant relieved amount in the receiving scheme.
This means that the transferred amount is added to any relevant relieved amounts relating to the individual in the receiving scheme, and will be tested against the individual's lifetime allowance at any subsequent benefit crystallisation events under that scheme for any previously untested UK tax relieved funds held.
Where a member has transferred to a QROPS and returns to the UK, will assets within the scheme benefit from the UK pension fund taxation advantages on income and growth?
No. The assets within the QROPS will be subject to the rules of the relevant tax authority in the country or territory in which the assets are situated. However, also consider the details on taxable property above.
For example, if a member of a Malta based QROPS has their funds invested into an Isle of Man life assurance bond, the funds will be subject to Isle of Man fund taxation. Currently, there is no taxation of funds held within a life assurance bond in the Isle of Man (other than withholding taxes on the underlying assets).
Where a member has transferred to a QROPS and returns to the UK, if they take an income from the pension is this regarded for income tax purposes as earned income?
It is likely that this will be the case. The existence of a double taxation treaty between the jurisdiction where the member resides and the jurisdiction of the QROPS provider is likely to be important.
For example, some jurisdictions may impose withholding taxes at source on benefits paid from the QROPS and in this case a double taxation treaty can ensure that the member can take the withholding tax into consideration when looking at any UK income tax.
Where a member has transferred to a QROPS and returns to the UK, will the UK pension rules for tax-free cash, retirement age and IHT apply?
The rules in the jurisdiction where the QROPS is based will govern these figures. However, where the local jurisdiction offers less stringent rules than in the UK, there may be member payment charges imposed in the UK. There may be local taxation as well as UK taxation depending on the jurisdiction of the QROPS provider. The existence of a double taxation treaty is therefore likely to be important.