Tax changes announced in the UK Autumn Budget in 2024 have made big impacts on QROPS pensions. And means much of the information about QROPS pensions on the internet, is now out of date.
If you’re thinking of transferring your pension, or already have a QROPS, here’s what you need to know.
What is a QROPS?
A Qualifying Recognised Overseas Pension Scheme (QROPS) is an overseas pension scheme that meets UK HMRC requirements, allowing UK pension savings to be transferred abroad without triggering an unauthorised payment charge.
QROPS were typically used by UK expatriates or those planning to retire overseas, offering potential benefits like greater flexibility, currency choice, and tax efficiency, depending on the jurisdiction.
They’re often based in a tax friendly locations like Malta, Gibraltar, and Guernsey. Allowing expats to take advantage of double tax treaties when withdrawing their pensions overseas, to avoid paying UK tax at source.
However, QROPS rules have changed in recent years, with the introduction of the 25% Overseas Transfer Charge in 2017 affecting many transfers.
Changes to UK Inheritance Tax treatment
Currently both UK pensions and QROPS sit outside of your estate for UK Inheritance Tax (IHT) purposes. But this will all change in 2027, where pensions will then form part of your taxable UK estate.
In the UK, pensions will be potentially subject to 40% IHT when you die. And your beneficiaries will pay income tax at a rate up to 45% on withdrawals after that.
For UK long-term residents, the tax treatment of a UK pension or a QROPS will be the same. So for UK residents it means the benefits of retaining a QROPS are rapidly diminishing.
If you’re planning to retire in the UK, a transfer to a UK pension scheme could reduce the costs of your pension, and simplify UK tax reporting.
However for expats living overseas, it’s a different story…
The changes to IHT in 2024, moved the UK Inheritance Tax system from a domicile-based system (taxed based on where you are born) to a residence-based system (taxed based on where you live).
This means once you’ve been living outside of the UK for 10 out of the last 20 years, only your UK assets will be subject to UK IHT.
A UK pension would still be subject to UK IHT. But a QROPS sits outside of scope for this, meaning for expats it’s likely to make sense to retain any existing QROPS pensions.
If you have a pension you know you won’t spend, and plan to pass on your beneficiaries, it could even make sense to pay the 25% Overseas Transfer Charge, rather than it being subject to 40% UK Inheritance Tax in the future.
Changes to the Overseas Transfer Charge
The Overseas Transfer Charge used to apply if you weren’t resident in the country in which you QROPS was based, unless you lived in the European Economic Area, where you could transfer to any EEA scheme.
In the 2024 UK Autumn Budget, it was announced that the exemption for transfers for EEA residents would be removed. Meaning you now need to live in the same country as the scheme you’re transferring to.
Otherwise there will be a 25% tax charge, on any funds transferred to a QROPS.
The reason QROPS schemes in locations like Malta, Gibraltar, and Guernsey were popular was because of the wide range of investment options available, and double tax treaties. Transfers to these schemes will now be costly and unlikely suitable for many expats.
There are local QROPS schemes you could transfer to, but these often don’t come with flexible investment options, and the charges involved may be less clear.
Do expats really need a QROPS pension?
Over the last decade the UK pension provider market has dramatically improved for expats.
It used to be the case, that many providers wouldn’t work with non-residents. But we’re now seeing major UK pension providers cater to the international market.
Some schemes will also facilitate payments to an international bank account, and may even make pension payments in foreign currencies.
It still leaves the challenge of paying UK tax, whilst potentially owing tax on your pension income in your country of residence, but with careful planning this can be mitigated.
After taking your first pension payment, expats can apply to HMRC for relief from double taxation, using the DT-Individual Form. This means any future payments, will then be free of UK tax at source.
So if you anticipate your income needs early, it’s possible to make a small withdrawal to trigger a UK tax charge, then apply for relief, before you start to rely on your pension income.
However, this is only necessary if the country you live in has a double tax treaty with the UK, which appropriately covers pensions, and favours UK taxation.
Tax treatment can vary widely across some countries, with some agreements favouring UK tax, and others favouring local tax.
If it’s the case that the double tax treaty with the country you live in favours UK tax, you shouldn’t to apply for relief at all.
Should you leave old pensions where they are?
Whilst QROPS transfers may no longer be appropriate for many expats, leaving UK pensions with your old pension provider is unlikely to be ideal either.
Many UK pension schemes (particularly workplace pensions) by default invest you in ‘Lifestyle Strategies’… these can be a big issue.
The way a lifestyle strategy works, is by moving your pension assets from high-growth to low-growth overtime.
But this one size fits all transition is rarely suitable for most people, and it’s certainly not made in consideration of your wider wealth.
This has lead to many expats seeing their pension returns decrease long before they need the funds, missing out on years of lost growth.
And with life expectancy in the late 80’s, it means some of your pension needs to keep growing, to fund a 20-30 year retirement – even if you’re drawing money from your pension today.
Our blog has a deep dive on Lifestyle Strategies here.
Alternatives for managing your UK pensions overseas
An alternative to both a QROPS transfer, or leaving your pension with its existing provider, is transferring to a Self-Invested Personal Pension (SIPP).
Many SIPP providers will accept transfers from international expats, allowing you to remain in control of your finances.
A SIPP allows you invest in a wide range of assets, including stocks, bonds, ETFs and mutual funds.
With careful planning, these can be structured to optimally support your retirement income needs, instead of just generating growth or income.
And with the right tax planning, the impact of UK tax on your pension could be entirely mitigated.
Looking for help to manage your UK pension whilst overseas?
Are you an expat with a pension worth over £150,000? Arrange your complimentary initial consultation today.
