Transferring UK pensions to a QROPS can offer flexibility, tax, estate planning and currency benefits, but is it suitable for everyone?
While transferring to a QROPS can offer tax efficiency, estate planning flexibility and currency benefits for UK expatriates, is it suitable for everyone?
One of the many UK pension options for British expatriates today is transferring to a Qualifying Recognised Overseas Pension Scheme (QROPS). Despite being widely seen as the answer for expatriate retirees, QROPS are by no means a one-size-fits-all solution.
What is a QROPS?
QROPS is a label for foreign pension schemes that meet HM Revenue & Customs (HMRC) rules to receive transfers from UK-registered pension funds. Introduced in 2006, this enables British expatriates to simplify their affairs by taking their pensions with them. Schemes only make the HMRC list if they meet similar conditions to UK pensions, such as not being generally accessible before age 55.
QROPS & tax efficiency
Currently, EU residents can transfer UK pensions into an EU/EEA-based QROPS tax-free. However, transferring to a QROPS outside the bloc will trigger a 25% UK ‘overseas transfer charge’ (OTC).
Note there are no Spanish, Portuguese, French or Cypriot schemes on the list of approved QROPS, so if you are resident in one of those countries you need to choose an eligible scheme in another EU/EEA member state to avoid penalties.
The UK 2021 budget did not include any changes to QROPS, so transfers to EU/EEA-based QROPS currently remain tax-free for EU residents. But now the UK has left the bloc, this 25% tax charge could potentially be extended to capture EU transfers in future.
Once in a QROPS, funds are sheltered from UK taxes on income and gains and no longer count towards your lifetime pension allowance (LTA). If you are already over the limit when transferring, 25% is charged on the excess, but funds become immune from further LTA penalties.
Will you face tax penalties on your pensions? Exploring the LTA and OTC
Otherwise, QROPS funds only become taxable once you start taking benefits in your country of residence.
How QROPS are taxed in Spain
When accessing QROPS or taking UK pension lump sums and income, the general Spanish income tax rates apply for residents of Spain. These vary regionally but tend to start at between 18.5% and 21.5% and rise progressively to a top rate between 45.5% (Madrid) and 54% (Comunidad Valenciana).
For the full rates in your region, download our free Guide to Taxes in Spain.
Residents of Spain can find alternative tax-efficient options for reinvesting pension funds, so take personalised advice to establish the most suitable approach for you.
How QROPS are taxed in France
Usually, UK pension and QROPS income is taxable in France at the income tax scale rates. For 2021 these start at 11% from €10,085, peaking at 45% for income over €158,122 (3%/4% surcharges apply over €250,000/€500,000). However, under certain conditions it is currently possible to take your whole pension fund as a lump sum and pay just 7.5% tax with an uncapped 10% allowance.
Pension income in France also attracts 9.1% social charges (7.4% for pension income under €2,000 a month/€3,000 per couple) unless you hold EU Form S1 or are not affiliated to the French healthcare system.
For French residents, reinvesting pension funds into a suitable assurance-vie – a specialised form of life assurance where the underlying investments attract no tax in France – may be more beneficial than a QROPS.
See more about how you are taxed in France
How QROPS are taxed in Portugal
Portuguese residents accessing QROPS or UK pension income will face progressive income tax rates ranging from 14.5% to 48% in 2021, unless you hold non-habitual residence (NHR) status. Under NHR, QROPS/UK pensions are instead taxed at a flat rate of 10% for the first decade in Portugal. If you qualified for NHR before the rules changed in April 2020, you can continue receiving tax-free QROPS and foreign pension income for the remainder of your ten-year NHR period.
If you do not have NHR status (or your term has expired), you could find alternative tax-efficient options for reinvesting pension funds as a Portugal resident, so take personalised advice to establish the most suitable approach for you.
See more about how you are taxed in Portugal
How QROPS are taxed in Cyprus
Under certain circumstances, it is possible for Cyprus residents to withdraw QROPS funds as one lump sum tax-free. Otherwise, QROPS and UK pension income are 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, from which point rates between 20% and 35% apply. Beware that, although lump sums from a UK pension can be taken tax-free, 75% will be taxable in the UK if you withdraw it all at once.
See more about how you are taxed in Cyprus
QROPS & 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 to pass on to your heirs.
But this freedom also brings more potential to exhaust your funds – unlike a UK annuity or ‘final salary’ pension which provide a guaranteed income for life.
QROPS & 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.
QROPS & estate planning flexibility
While 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.
QROPS & multi-currency options
While UK pensions only pay out in sterling, some QROPS allow you to invest funds and make withdrawals in more than one currency. This is a major advantage for British nationals living abroad as it removes currency conversion costs and reduces dependence on pound/euro exchange rates.
QROPS & freedom from UK rules… to a point
Funds in a QROPS are no longer governed by UK pension legislation, so are generally protected from future changes to UK rules. Beware, however, that (unless you transferred before 9 March 2017) you could still be subject to UK legislation – and taxation – if you move outside the EEA within five UK tax years of the transfer date.
Where the transfer falls within the unauthorised payment rules, tax penalties of up to 55% on the transfer value can apply – potentially even if you moved funds before the rules changed.
Regulated, tailored pensions advice is crucial
Overseas pension transfers are complex – and a key target for pension scams – so do not underestimate the value of regulated advice. You should explore your full range of options to establish the most suitable pension solution for your particular circumstances. If you decide to transfer, act soon, before the rules potentially change post-Brexit.
In any case, you will need specialist guidance to find a suitable product, navigate the cross-border tax issues, and ultimately secure your long-term financial security in this ever-changing pensions landscape.
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