In previous articles we examined the principles of QROPS, and why QROPS could be advantageous to expats in certain circumstances.
In this brief discussion, we’ll look at some of the ‘qualification’ and related issues that apply to those trying to move their pension savings out of the UK to a QROPS.
QROPS – A ‘not entirely clear’ situation
The general package of legislation and other changes now referred to as ‘QROPS’ was introduced into the UK in 2006.
Some have described this as being driven by EU ‘fair play’ legislation though others attribute it to HM Revenue & Customs (HMRC) trying to close loopholes in pension laws that were being abused by expats.To some extent the debate is academic – what nobody disputes is that as usual when pension laws change, there is some confusion about how aspects of these changes applied to specific circumstances.
Certainly at the time of writing, there remain different interpretations of some of the fine detail and test cases are pending for the courts to consider. As this remains a fairly new and complicated area, what follows must be read as only a superficial awareness raising discussion. To find out what applies or does not apply in your particular case, you must contact a duly authorised expert for advice.
QROPS Schemes – The basics
Almost everyone accepts that it is fair and just to allow people to move their pensions savings to whichever country they choose. Having said that, many countries, and the UK is one of the world’s stricter in this respect, do not accept that the funds accumulated in these pensions schemes should be used as and when the individual requires. They do not accept, for example, that people should be allowed to blow their entire pension fund on that luxury car to celebrate their 50th birthday.
UK governments insist that we take some responsibility for providing for our old age and will always seek to ensure this is the case within reason. It is therefore critically important to note a basic principle here; if you hold pension funds in the UK – the UK government’s view applies irrespective of where you live in the world. If you have paid into a UK pensions scheme, then they believe they a right and in fact duty to decide in principle what you can do with these funds even if you are now resident overseas.
They have therefore looked for a ‘middle path’ that will allow movement of pensions funds around the world to support a mobile population and give greater freedom of choice, while at the same time providing some restrictions on the use of these funds.
This essentially is what QROPS seeks to provide – a system that allows transfers but under controlled circumstances.
QROPS – ‘Approved Scheme’
At the heart of QROPS is the principle of a duly qualified, registered and approved overseas scheme. What this boils down to simply, is that the UK authorities will allow the transfer of pension funds out of the UK to an overseas scheme if it meets certain criteria.
These criteria are quite complicated but essentially can be summarised as showing that the overseas scheme;
– Is a duly registered and legal pensions scheme within the legal jurisdiction of the country it is based within such as Spain or Australia etc.
– Is a true pension scheme and is not just going to allow the funds holder to access their funds immediately tax-free – at least for the ‘reporting period’ (see below)
A list of approved schemes by country is held by HMRC and is available on the Internet at their site www.hmrc.gov.uk.
Please don’t ring them up and ask them to add your local bank’s pet scheme to their list – it’s a little more complicated than that!
QROPS – UK residents / Non-expats
As a UK resident you can transfer your pension funds to a QROPS. You do not have to be an expat to do so.
If, however, you remain resident in the UK on an ongoing basis, you would be unable to obtain significant advantages via earlier access to larger tax-free sums from your QROPS as these would be liable to UK income tax.
QROPS – Qualification period
If you are a newer expat and have moved your pension funds into a QROPS, you will only be able to obtain benefits from your QROPS to the same level as a UK scheme for an initial 5-year period. This applies irrespective of where you are living.
To obtain the flexible tax-free advantages that a QROPS can provide, you would theoretically need to be resident outside of the UK for a period of 5 years.
QROPS – Reporting
All QROPS must be able to demonstrate to HMRC they are adhering to basic UK practices for a period of five years after funds transfer. This entails issuing periodic ‘benefits paid’ reports to HMRC to prove that the pension scheme is really a pension scheme and not just a shell operation to allow people free access to their pension savings without penalty in less than the qualification period.
Any QROPS that fails to comply with this requirement can be removed from the approved list held by HMRC – this is not just a theoretical event and it has already happened.
At the end of the five-year period the QROPS is free to stop this reporting and to revert to whatever local laws dictate.
It is after this period that most potential benefit exists for expats.
QROPS – Time delays
From the time you first apply to your UK scheme for the transfer, you should expect a delay of around 6-7 months for the paperwork to complete and the funds to transfer.
QROPS – A summary
All in all, some QROPS schemes offer very significant advantages to expats and are worthy of consideration. You could obtain large benefit from moving your funds into one. Even so, it is mistaken to believe that moving to a QROPS is going to give you instant full and unrestricted access to your funds. It is probably best considered as something that will give you more freedom and return in the medium term rather than ‘tomorrow’.
It is worth keeping in mind though a few basic common sense points:
1. Moving to a QROPS does not in itself mean that you’ll get better usage of your pension funds. Some countries have regimes that are even less flexible than the UK’s. You must check with an expert first AND independently get confirmation in writing from the QROPS you’re considering as to how and when (and with what if any tax penalties) you or your next of kin will be able to access your funds.
2. Remember that many pension schemes can, under certain circumstances, be either vulnerable or deliver benefits far below expectations. Having faster and freer access to your funds in due course will not be much consolation to you if they are only 50% of the value you put in to begin with. ALWAYS check the details of any scheme you are investing money in. Look at the history of the organisation offering the product and take expert advice. Do not assume that HMRC have done this for you!
3. Always seek a second opinion. Even some experts will freely admit that there are aspects of QROPS that have to settle down and as a result taking two different viewpoints before making a decision will reduce the chances of errors due to imprecise advice.
For advice, please use our QROPS UK pension transfer enquiry form.