Qualifying Recognised Overseas Pension Scheme

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A Qualifying Recognised Overseas Pension Scheme, or QROPS, is an overseas pension scheme that meets certain requirements set by HM Revenue and Customs (HMRC). A QROPS can receive the transfer of UK Pension Benefits without incurring an unauthorised payment and scheme sanction charge. The QROPS program was launched on 6 April 2006 as a part of new legislation with the objective of simplifying pensions.[1]

Typically this occurs when a UK resident leaves the UK to emigrate permanently (or to retire abroad) having built up a pension fund within a scheme approved by HMRC or when a person born abroad who has built up benefits in a HMRC approved UK Pension Scheme decides to return to their home country with an expectation of retiring there. The QROPS does not have to be established in the new country of residence, thus providing greater flexibility and stability, along with choice of scheme provider.[2][3]

HMRC states that:[4]

Under section 150(8) a recognised overseas pension scheme is an overseas pension scheme that meets the following requirements prescribed under The Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) Regulations 2006 (SI 2006/206). (Categories of Countries Regs) It must:

  • be established in a Member State of the European Union, Norway, Liechtenstein or Iceland, India, and the United States.[5] (HM Revenue and Custom’s legislation on these jurisdictions is regularly updated to monitor and improve the system – with non-conformity meaning a whole country can be de-listed.)
  • be established in a country or territory with which the UK has a Double Taxation Agreement (DTA) that contains exchange of information and non-discrimination provisions - see the list in RPSM14101046 (there is more information on the provisions of particular Double Taxation Agreements in the Double Taxation Relief Manual), or
  • satisfy the requirement that, at the time of the recognised transfer, the rules of the scheme provide that:
    • at least 70% of the funds transferred will be designated by the scheme manager for the purpose of providing the member with an income for life,
    • the pension benefits (and any associated lump sum) payable to the member under the scheme, to the extent that they relate to the transfer, are payable no earlier than they would be if pension rule 1 in section 165 applied, and
    • membership of the scheme is open to persons resident in the country or territory in which it is established.

Pension rule 1 in section 165 provides that no payment of pension may be made before the day on which the member reaches normal minimum pension age, unless the ill-health condition was met immediately before the member became entitled to a pension under the scheme.

To become a QROPS, a pension scheme must apply to and be approved by HMRC. A list of QROPS that have consented to have their names published is available on the HMRC website and is regularly updated.[6]

In April and May 2012 HMRC introduced a new host of regulations that had the effect of shifting the jurisdictions in which QROPS could be established. Guernsey had previously been the premier jurisdiction for QROPS but due to a conflict in between local legislation and HMRC regulations over 300 schemes were de-listed, but rather than close them permanently this had the effect of migrating the schemes to Malta. Malta was at this time regarded as an attractive proposition for the industry. It currently has 59 DTAs with other countries including EU member states. It has been proactive in the development of the QROPS market with the installation of local regulators to work with HMRC in order to ensure that all rules and procedures are adhered to. [7] Since the new regulations came into force QROPS were also closed in Cyprus and are now principally available in Malta,[8] the Isle of Man,[9] and Gibraltar.[10]

A QROPS should operate broadly in line with UK pension rules. A UK pension holder who has transferred their pension to a QROPS should be in a similar position as they would have been if the transfer had not taken place. What differentiates a QROPS from a UK held pension is that it must be recognised as a pension scheme under the country's legislation where it resides whilst still complying with the rules set out by HMRC. As the jurisdiction's rules, where the pension resides, differ to UK rules this leads to benefits available to the holder in comparison to a UK pension scheme. These benefits include having a greater choice of how much income can be drawn and the ability to avoid death taxes.[11] On returning to the UK a QROPS will be treated the same as any other UK pension scheme which may necessitate changes to the underlying holdings. A key requirement prior to returning to the UK is to ensure all investments held within the account are UK compliant. This may involve selling some or all of the current investment holdings. The policy can then be fully endorsed.

QROPS schemes are required to report to HMRC any payments made to the member for at least ten years from the date that the transfer took place. However if the pension holder has been non-UK resident for five complete tax years they can benefit from more attractive options than those allowed under UK pension schemes.

QROPS are increasingly popular with British Expats due to the tax advantages they offer on pension draw downs and their ability to be transferred to chosen beneficiaries in the event of the pension owner's death. Pension funds left in the UK are heavily taxed, in some cases up to 55%. Transferring a UK pension fund into a QROPS can avoid UK taxation.

In April, 2015 an amendment to section 3 of the Categories of Countries Regs added what HMRC describes as the Pension Age Test; that

 [(6A)The benefits payable to the member under the scheme, to the extent that they consist of the member's relevant transfer fund, 
  are payable no earlier than they would be if pension rule 1 in section 165 applied.]

This is a surprising addition as this requirement already appeared in section 2 (4) (b). It appears from the drafting of the amended regulation, that the department aimed this new requirement at the legal system of the host jurisdiction rather than at the deed governing the scheme, the rules of the scheme or the conduct of the scheme provider.

Also in April, 2015, HMRC wrote to all QROPS scheme in Australia and New Zealand and asked then to declare in writing to HMRC how they met the Pension Age Test; whether under the law of the country where the scheme is established or to say that the rules of the scheme do not allow benefits from UK tax relieved funds earlier than age 55 unless the member is retiring due to ill-health. 2015 HMRC guidance indicates that it is HMRC's view that the new section 6A may be read such that the Pension Age Test may be imposed by either of these methods.

The Kiwisaver Act 2006 (NZ) Schedule 1 sections 8 and 10 schemes require that members may withdraw to purchase a first home or in the case of significant financial hardship. The HMRC QROPS list published on 19th May, 2015 included no Kiwisaver schemes and consequently a drastically reduced New Zealand list.