For expatriates, transferring UK pensions to a QROPS can offer more flexibility, tax efficiency, estate planning and currency benefits, but is it always a good idea? 

One of the many pension options available to British expatriates today is transferring to a Qualifying Recognised Overseas Pension Scheme (QROPS). 

QROPS are foreign pension schemes recognised by HM Revenue & Customs (HMRC) to receive tax-free transfers from UK-registered pension funds. They were introduced in 2006 to help Britons who have permanently moved abroad simplify their affairs by taking their pension savings with them.  

Despite being widely seen as the answer for expatriate retirees, QROPS are by no means a one-size-fits-all solution. Here we take a look at some of the advantages and disadvantages of moving UK pensions to a QROPS.

Tax efficiency

Currently, EU residents can transfer one or more UK pensions into a QROPS without paying tax, so long as the QROPS is based within the EU/EEA. However, other transfers could trigger a 25% UK tax penalty or even 55% if not structured correctly, so take extreme care.

Once in a QROPS, funds are sheltered from UK taxes on income and gains. They also no longer count towards your lifetime pension allowance (LTA), so can grow unlimited without attracting LTA penalties of 25% or 55% when accessing your money.

While QROPS funds become taxable once you start taking benefits in your country of residence, many expatriates resident in Europe can receive favourable tax treatment. 

  • UK pensions in Cyprus

Cyprus residents with a Maltese QROPS, for example, can withdraw pension income tax-free under the Malta-Cyprus double tax agreement.

If you do not transfer to a QROPS, UK pension income is taxable in Cyprus in one of two ways. You could either choose a flat rate of 5% (with a €3,420 allowance) or add it to your annual income and pay the relevant scale income tax rates. This is zero for income under €19,501, otherwise rates between 20% and 35% apply. Your initial lump sum can be taken completely tax-free.

See more about how you are taxed in Cyprus

  • UK pensions in Portugal

Even without transferring, Britons resident in Portugal can enjoy tax advantages on UK pensions. Through the UK-Portugal double tax agreement, UK state, personal and non-government service pensions are taxable solely in Portugal. For people who are classified as non-habitual residents (NHR), this can mean tax-free UK pension income for the first ten years

For expatriates without NHR status, UK pension income is taxable at the progressive Portuguese income tax rates up to 48%. Under certain conditions, however, it is possible to receive up to 85% tax-free.

See more about how you are taxed in Portugal

  • UK pensions in France

QROPS funds only become taxable once you start taking benefits in your country of residence. Usually, pension income is taxable in France at the income tax scale rates up to 45%. Although you can take a quarter as cash in the UK tax-free, lump sums are subject to French taxation if you are French resident. Under certain conditions, however, it is possible to limit this tax to just 7.5% with an uncapped 10% allowance. All pension income also attracts 7.4% social charges unless you hold EU Form S1 or are not affiliated to the French healthcare system. 

For French residents, reinvesting pension funds into an 'assurance-vie' – a specialised form of life assurance where the underlying investments attract no tax in France – may actually be more beneficial than a QROPS.

See more about how you are taxed in France

Flexible access

While UK pensions can be restrictive, many QROPS allow you to take as much cash or income as you like, however and whenever you want. You could, for example, draw a higher income in early retirement when you are most active and reduce it in later years. Or you could take a lump sum and preserve the rest for a rainy day or for future generations. 

However, with this freedom comes more potential to exhaust your funds – unlike a UK annuity or ‘final salary’ pension which provide a guaranteed income for life. See six questions to consider before transferring a final salary pension

Diversification and investment choice 

QROPS usually offer more options than UK pensions for how your money is invested, and are not as over-exposed to UK assets. You can choose a flexible investment plan across a wide range of funds to suit your circumstances, objectives, timeline and risk appetite. 

As the value of any investment can go down as well as up, this introduces an element of risk to your retirement funds that is absent from a guaranteed annuity. However, an active, well-diversified investment approach can manage and minimise risk.

Estate planning flexibility

Whereas most UK pensions are only payable to your spouse on death, QROPS offers the option to include other heirs. So rather than dying with you or your spouse, your pension wealth could pass to any named beneficiary, even across generations.

QROPS may also offer some protection from UK inheritance tax when passing pension assets to non-UK resident heirs, although they may still be subject to local succession taxes

Multi-currency options

While UK pensions only pay out in Sterling, some QROPS allow you to invest your funds and make withdrawals in more than one currency. This is a major advantage for British expatriates living abroad as it reduces dependence on Pound/Euro exchange rates and removes currency conversion costs. 

Freedom from UK rules…to a point

Funds in a QROPS are no longer governed by UK pension legislation, so are protected from future changes to UK rules. However, you could still be subject to UK legislation – and taxation – if you transfer funds again to an unapproved scheme within five tax years (for funds transferred after 8th March 2017), or if you permanently return to the UK within ten years. 

Note also that the goalposts for QROPS are highly likely to shift in the future. Since their inception in 2006, the UK government has made numerous revisions to pension transfer rules and delisted thousands of QROPS from various jurisdictions. There is now far more complexity in the QROPS market than people realise.

For example, currently there are no Portuguese, French or Cypriot QROPS on the HMRC list of approved QROPS. Expatriates resident in those countries therefore need to take care to choose an eligible scheme in another EU/EEA country – such as Malta or Gibraltar – to avoid transfer penalties

Where HMRC deems that its rules have been broken, it can charge a 55% tax penalty on the transfer amount – potentially even if you had moved funds before the rules changed.

Regulated, tailored advice is crucial

Overseas pension transfers are a complex area – and a key target for pension scams – so regulated advice is essential. Take extreme care to explore your full range of options to establish the most suitable pension solution for your particular circumstances. If you decide to transfer, you will need specialist guidance to find a suitable product, navigate the cross-border tax and jurisdiction issues, and ultimately secure your long-term financial security in this ever-changing pensions landscape.

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Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.