QROPS

QROPS: A Qualifying Recognised Overseas Pension Schemes

What are they and what is the benefit to you?
Self-Invested Personal Pensions (SIPPs) represent an unrivaled amount of freedom and flexibility for your retirement and investments. Discover what they are and how you can make a plan like this work for you.

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    Introduction To QROPS

    The majority of people that have a history of UK employment have built up pension benefits in various schemes which may now not be suitable to their specific requirements. 

    In many cases the pension scheme or schemes you become a member of whilst working in the UK, were not your choice, but yet these pensions could end up or already be one of your biggest investments and a considerable part of your retirement plan.

    Professionals working for the same company all with very different needs and goals all having the same scheme means that some employees have a suitable pension and others perhaps the opposite.

    This guide aims to explain how a Qualifying Recognized Overseas Pension Scheme (QROPS) may be a more suitable home for your pension benefits and how it might be used to fund your retirement.

    Careful consideration should always be taken before making any changes to any of your pension arrangements, hopefully the below information gives you a good starting point.

    What is a QROPS?

    A QROPS is usually a type of personal pension. They are typically defined contribution (money purchase) schemes and meet certain requirements set out by HMRC.

    The word qualifying means that HMRC agree that the scheme is similar enough to a UK pension scheme so UK pension holders can transfer their benefits. This then means that the benefits can be withdrawn without being subject to any UK tax.

    If HMRC does not recognise the scheme and a member transfers, it may be seen as an unauthorised transfer and subject to an unauthorised transfer fee.

    The most popular jurisdictions are:

    • Malta
    • Gibraltar
    • Isle of Man
    • Guernsey
    • Jersey
    • New Zealand
    • Australia
    QROPS subject to tax

    HMRC recognise that these jurisdictions to meet their criteria however, all of these countries have their own:

    • Tax Treaties with other countries
    • Rules around access to your money
    • Rules on how much PCLS you can take (tax free amount at the start)
    • Investment Criteria.

    Who Qualifies for a QROPS?

    There are a number of criteria that need to be met for either the member or the pension to qualify for a QROPS:

    • Anyone whom has UK pension benefits with a value (excluding UK state pension) might qualify for a QROPS
    • Anyone with defined benefit (final salary) schemes that are NOT already in drawdown
    • Any pension benefits that have NOT already been used to purchase an annuity
    • You must have either been out of the UK or intend to stay out of the UK for 10 complete tax years or the pension reverts to the UK rules. The UK rules also continue to overlap those of the QROPS for 5 years after the QROPS is established
    • You are planning to go live overseas (UK residents).

    You can no longer transfer unfunded public sector schemes i.e. armed forces, police, fire service, teachers and civil service pensions but you still have the option with local government schemes.

    Is a QROPS right for you?

    As with everything, it really depends.

    • Is the QROPS going to be more fit for purpose for you over and above your current arrangements and what are the pro’s and conns?

    As the QROPS is a type of defined contribution scheme, if you have a defined benefit scheme the first question:

    • Would it be more suitable to transfer away from your guaranteed pension to a more flexible one?’

    That question is so broad it deserved its own guide:  

    Click to download our guide to DB transfers

    QROPS Or SIPP?

    Then the question is why would you chose the QROPS over a UK SIPP (Self- Invested Personal Pension):

    • Does it provide any additional advantages from either a tax or lifetime allowance perspective?’

    Click to download our guide to SIPPS

    If you already have a defined contribution scheme whether that be personal or occupational the same questions apply with the additional questions:

    • Are there any additional benefits from an investment or currency perspective?
    • Does the additional cost of working with a financial advisor outweigh any extra cost?

    Funding a QROPS

    A QROPS is almost always funded by transferring existing UK pensions although they will take additional contributions from earnings.

    A QROPS will accept transfers from all types of UK schemes and also, sometimes, from other QROPS. You may decide you want to retire to a different location and after reviewing your current arrangement find that it would be more beneficial to move to another QROPS or even to a UK SIPP.

    Overseas Transfer Charge

    A QROPS is almost always funded by transferring existing UK pensions although they will take additional contributions from earnings.

    A QROPS will accept transfers from all types of UK schemes and also, sometimes, from other QROPS. You may decide you want to retire to a different location and after reviewing your current arrangement find that it would be more beneficial to move to another QROPS or even to a UK SIPP.

    The most simple explanation is that the 25% tax charge does not apply to people whom are tax residents in the EEA and transfer to another EEA member country (e.g. you are a tax resident in Spain and transfer to Malta) or, if the transfer is to a QROPS in the same country you are a tax resident (e.g. you are a tax resident in Australia and the transfer is to Australia).

    The 25% charge is only when transferring a UK pension to a QROPS, in most cases once your pension is outside the UK you can transfer from QROPS to QROPS without the overseas tax charge, but only where the money was originally transferred from the UK to the QROPS before March 2017.

    Pension transfers are a very complex area of financial planning. After reading this guide why not allow Expat Wealth Adviser to introduce you to a trusted, qualified, gold standard pension transfer specialist.

    Options at Retirement

    Various different QROPS have differing rules however generally the first 25% – 30% has no tax in the country the QROPS is situated.

    As with any personal pension you can withdraw your benefits from age 55. Some QROPS jurisdictions still have capped drawdown (Gibraltar) and some have adopted full flexi access like the UK (Malta).

    1

    Annuities

    You can choose to buy an annuity with some or all of your QROPS fund. This will provide you with some certainty regarding fixed costs and guarantees the pension will not run out in your lifetime.

    Annuities are available from most insurance companies and the income you receive will depend on a number of factors including your age, health and whether the annuity income will include a spousal benefit.

    An annuity takes away any investment risk as the risk is borne by the insurer. Although other risks include the amount you get not being as much as you paid for the annuity. Also, if inflation increases your retirement income technically reduces.

    Once you give any money to an insurance company you effectively lose right to your capital as you give it up in return for an income stream, therefore nothing for any beneficiaries.

    2

    Drawdown

    This can mean either flexibly withdrawing or taking regular income. The income can be either taken from profit from funds I.e. dividends, coupons or interest or by selling part of an asset.

    Typically, the money not withdrawn remains invested therefore subject to market movements so a higher risk strategy than buying an annuity.

    Flexible drawdown can be beneficial if the amount of some of your other income varies as you could choose to take an amount from your pension that doesn’t push you into a higher tax bracket.

    It can also be useful for those wanting more capital in their younger years or not wanting any at all if markets haven’t been great.

    Mix and Match

    The flexibility of drawdown options allows you to customize your income and have tax planning opportunities. You could buy an annuity with part of the pot which would cover fixed expenditure then have all discretionary spending in the form of flexible drawdown.

    Funding a QROPS

    A QROPS is almost always funded by transferring existing UK pensions although they will take additional contributions from earnings.

    A QROPS will accept transfers from all types of UK schemes and also, sometimes, from other QROPS. You may decide you want to retire to a different location and after reviewing your current arrangement find that it would be more beneficial to move to another QROPS or even to a UK SIPP.

    Self-Invested Personal Pensions (SIPPs) After you die

    The underlying investments usually growth free of income and capital gains tax if structured correctly

    It is possible to transfer to a QROPS with no tax charge (see above)

    There could be favorable tax treaties with other countries from one of the QROPS jurisdictions than the UK meaning a lower income tax liability in drawdown

    On death, beneficiaries have no immediate tax to pay. They will most likely have an income tax liability which as with the original member will be based upon any tax treaties and the amount, they withdraw

    Up to 30% of the pension is paid tax free from the QROPS

    A Summary of the Tax Advantages of a QROPS

    There are a few jurisdictions that the pension income from a QROPS is taxed at zero and these include the UAE, Oman, Saudi and Qatar.

    In some scenarios it’s possible to remove your entire pension benefits from the system and remove the entire amount from income tax in any country.

    This is a complex subject and process and expert advice is advised.

    A Summary of Non-Tax Advantages of a QROPS

    Full access from 55 years old

    Control of where the money is distributed on death

    Multiple currency options to suit your needs

    The ability to personalize your investment strategy

    Allows consolidation of more than one pension

    The ability to transfer to other QROPS or even a SIPP

    A QROPS usually comes with the added benefit of a financial advisor

    Transferring Pensions Into a QROPS

    It’s generally not a good idea to transfer any pension benefits where you are still receiving the tax advantages on the contributions from UK earnings or the transfer would mean losing employer contributions.

    If you’re a deferred member of any pensions (not contributing) a QROPS maybe the solution. QROPS will take transfers from all types of UK including other QROPS and UK SIPPS.

    Pension scmes can be broken down into 2 main categories which are defined benefit, also known as final salary and only are only occupational, and defined contribution schemes which can be occupational or personal.

    I have highlighted below some of the reasons people transfer the different types of schemes.:

    Transfers from Defined Benefit Schemes:

    SIPPS Transfer benefits

    You might give up your guaranteed benefits from a defined benefits schemes because you prefer a more flexible income

    You may prefer the higher death benefits for your beneficiaries

    You may have just had a transfer value you couldn’t refuse.

    You might want to access more of your pension at an earlier age for an increased lifestyle or potential short life expectancy

    You may require different currency needs to GBP

    Want To Learn More About Defined Benefits Transfers? 

    Click the button to download our Ultimate Guide To Defined Benefits Transfers

    Download Ultimate Guide To DB Transfers Now

    Transfers from other Defined Contribution Schemes:

    Your existing scheme may have a limited fund range or funds that are not performing very well

    Self-Invested Personal Pensions (SIPPs) may have a more favorable tax treaty with the country you have

    You may want to consolidate many other pensions for ease of administration

    You may prefer a more personalized investment strategy

    You may require access to more currencies than GBP

    You may transfer your benefits from personal pension

    Self-Invested Personal Pensions (sipps)

    What to Watch out for!

    Excessive Fees

    There are several fees associated with setting up a personal pension.  Every firm will have different fees and their recommended trustee, platforms and investment managers will also with different fees.

    I have listed below the what fees can expect to pay when transferring a pension. If they are any higher than the below, ask extra questions. It’s very common in the offshore market for their firms to look for extra ways to get paid.

    Excluding you and your current defined benefit trustee. The parties involved in transferring a defined benefit scheme into your new personal pension are:

    • Financial Advisory firm and advisor
    • UK pension transfer specialist company
    • SIPP / QROP Trustee
    • Investment Platform
    • Investment Manager / Portfolio manager

    Follow the guidelines below so you are well informed for any dealings with advisory firms:

    Initial Advice Fee

    This is the fee that the advisory firm charges for their advice process and for facilitating the transfer. It ranges from 1% to 7% (I have even seen 8%) and is mostly paid from your pension directly to the advisory firm.

    There are 2 options in the way to pay your financial advisory firm and that’s via commission or an upfront fee. Generally, its commission in the less regulated markets and an upfront fee in the more regulated markets and generally comes from your pension although that’s not mandatory.

    • The commission way will mean 100% of your pension is invested on day one and you’ll have exit penalties should you exit the investment platform. This can be a powerful way to set up your pension if the fee is reasonable but if the fee is high it will drag on performance. As a general rule, if your platform fee is 1% per annum for 10 years i.e. 10%, the advisory firm is being paid 7% upfront.
    • The fee way usually involves an ordinary investment platform where the fee is taken at the start. It usually ranges from anywhere between 2% & 5% depending on the size of the pension and the recommending company. This is the only way advisors can charge in the UK as its transparent and comes with no exit penalties.

    Either way ask for full transparency and there’s nothing wrong with asking how much the adviser gets paid. My advice is you shouldn’t be paying any more than 5% whether its upfront or in the form of commission.

    The truth is you can literally design your own charging structure within a personal pension. My advice is to compare both ways.

    Be wary of anyone that says ‘don’t worry about fee’s, we get paid by the product provider as this is far from transparent. Who do you think pays the product provider… that’s right, you!

    Investment Platform Fees

    The platforms that have the option to pay commission to the adviser as mentioned above typically have admin fees which continue for the life of the platform. These are typically, around 400 GBP per annum but as a percentage of a £100,000 transfer its 0.4% in addition to the amount they collect from you for indemnifying the commission to the advisory firm, assuming commission was paid.

    The ordinary platforms have an annual management charge of between 0.3% and 0.4% which runs for the life of the platform and is based on the value of the pension.

    Ongoing Advice Fee

    This usually ranges from 0.5% to 1% depending on the size of the pension and will fluctuate with the new pension fund. Sometimes the underlying investment strategy pay the ongoing fee to the advisory firm.

    Don’t be fooled, if a fund pays 0.5% back to the advisory firm that fund is exactly 0.5% more expensive than the ‘clean’ version of that exact same fund.

    Again, you want absolute transparency here and ideally you agree a service fee which is then paid via the platform and not from the underlying investment strategy.

    Trustee Fees

    Both set up and ongoing fees are paid to your new trustee until you drawdown. SIPP set up fees are usually around £300 and annual admin fees of £500, this means upfront you have £800. QROPS are usually around double. Please note some trustees have ‘light schemes’ for smaller amounts.  

    Portfolio Manager Fees

    Some advisory firms will choose to use a portfolio manager to run their client portfolios. This can be highly beneficial and lower risk for the company however (more below) external ones are usually by far the best and annual management charges range from 0.3% – 0.5%.

    Underlying investment / fund manager fees: This all depends on the strategy and can range from almost negligible to around 0.7%. A portfolio manager selecting stocks pays very little for that but a portfolio manager selecting a range of external funds

    My advice is to plot ALL fees on a excel file converted into a percentage of your pension value. Be mindful that if this gets to above 3% you will struggle to achieve any real growth after inflation unless you’re an aggressive investor.

    Past Performance of Proposed Funds

    Still one of the most common statements in financial services and its true. I urge you to delve a little deeper. Yes’ if a portfolio management company consistently out performs their peer group and benchmarks there’s a good chance they will continue to do so but is there anything else at play here.

    The best example I can give is where an investment fund is denominated in GBP but mainly holds US companies denominated in US Dollars. At the moment these look fantastic however most of the out performance is due the weakening of GBP against the USD.

    Internal Funds

    Very common with firms trying to increase their ongoing revenue is for them to bring the management of client money is to do it in house. This means you still pay the same but the firm gets to keep more and you have far less expertise however I have seen internal funds running at over 3% with awful performance to match.

    Summary

    There are some great financial advisory firms outside the UK but also, the exact opposite. A few last words of wisdom would be to make sure:

    • Any advisory firm is regulated
    • The advisor they select for you is qualified to UK level 4 minimum and has testimonials
    • You are not rushed into a decision
    • You are thorough and consider all possible future scenarios
    • You are offered to pay via a fee and not just commission
    • You get clarity of ALL fees and do your excel file

    As always Expat Wealth Adviser is here to help, feel free to reach out for anything from an initial conversation to a full analysis of a proposal for a transfer of your pension to a personal pension.

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