Qualifying Recognised Overseas Pension Schemes (QROPS) were introduced in April 2006 on the back of EU directives on pension harmonisation. The intention was to enable British expatriates to simplify their affairs by taking their pension savings with them by transferring to a new scheme in their new country of residence.
QROPS can offer various benefits and quickly became popular with expatriates. However, the situation has changed significantly since 2006. HM Revenue & Customs (HMRC) has got much stricter, issuing new regulations and guidance over the years. The QROPS market today provides less choice and more complexity than many realise. And where HMRC deems that its rules have been broken, it can apply a 55% penalty charge of the amount you transfer.
Now of course we also have the new UK pension freedom. This opened up many new opportunities for UK schemes, and QROPS is just one option which should be considered along with all the others.
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In the latest crackdown on QROPS, the registered overseas pension rules were changed in line with those brought in for UK pensions. HMRC sent a “legal request letter” to all global providers of QROPS, dated 17th April but backdating the new rules to 6th April 2015.
The letter requests that the provider must satisfy itself that it meets the rules for Recognised Overseas Pension Schemes (ROPS), and seeks confirmation from the schemes that they are still compliant with the rules.
Specifically it asks three questions: (1) Does the scheme satisfy the ROPS conditions? (2) Does it meet the minimum age test (age 55)? (3) Does it wish to appear on the public lists of QROPS?
One of the rules for an overseas pension scheme to qualify as being recognised as a QROPS is that it follows UK pension rules. The minimum age for taking benefits from a pension is therefore 55, unless the member is in severe ill health.
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HMRC wants confirmation that either the laws of the country where the scheme is established prohibit payment of benefits to member under 55, or scheme rules prevent this where UK tax relief has been paid.
The letter is perceived as an attack on Australian and New Zealand QROPS schemes, since although they meet local national rules, benefits can often be accessed before the age 55 for reasons other than ill health.
This raises the prospect of British expatriates in these jurisdictions facing a penalty charge.
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Australian schemes tend to follow national law which allows members early access if they are suffering financial hardship, as well as ill health.
New Zealand law also allows access for financial hardship, and “Kiwisave” schemes allow members early access after three years to buy a house. The government introduced these schemes in 2007 and they were promoted as a way to transfer UK pension wealth. The industry is seeking clarification from HMRC, but as things stand Kiwisaver schemes cannot accept transfers from UK pensions.
If the QROPS schemes in both countries (or any other country) do not comply with the rules, transfers into the scheme could suffer penalty charges of 55%.
New pension freedom and QROPS
Since the new UK pension freedom was announced there has been uncertainty as to whether it will also apply to QROPS.
In March, HMRC confirmed that non-EU QROPS have to temporarily continue to apply the rule where 70% of the transfer value made to a QROPS has to provide an income for life. Therefore non-EU QROPS (including those in jurisdictions like Guernsey) cannot currently offer the same flexibility as UK pensions.
EU QROPS schemes can offer the flexibility, and Malta became the first QROPS jurisdiction to change local legislation to allow full flexibility.
Malta also meets the new conditions for ROPS.
Transfers from defined benefit schemes
In the lead-up to the UK pension freedom, the UK Financial Conduct Authority (FCA) confirmed that all transfers from defined benefit (final salary) schemes can only take place if the member has received advice from a pension transfer specialist regulated by the FCA. This includes transfers into a QROPS.
Overseas advisers who are not FCA regulated and transfer pensions into QROPS will need to pass cases onto UK authorised firms to provide the advice, though the UK adviser many never meet or speak to the client.
Overseas pension transfers are complicated at the best of times, with a myriad of rules, which frequently change. You need to be extra careful when moving into a QROPS and choosing which one would best suit you. The only way to ensure that a QROPS is the best solution for you is to explore all your other pension options and weigh up the pros and cons of each. This includes looking at the tax implications in your country of residence.
You need specialist and personalised advice, and from a firm which has both UK pension specialists and Spanish and UK tax specialists.
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.
For more information and personalised advice, contact Blevins Franks on +34 971 719 181.
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This article was written on the 20th of May, 2015.