QROPS: the basics

When Qualifying Recognised Overseas Pension Schemes were introduced in 2006, they were part of the shake up the government planned as its Pension Simplification initiative. As you might expect, as “normal” UK pensions are complicated enough, then the regulations controlling these overseas schemes are twice as difficult to unravel.

So what are the very basic facts that a member of a UK pension scheme needs to know about a QROPS?

Members of UK private pension schemes can transfer their pensions into a QROPS as long as it is one that has been individually approved by HMRC. That means that HMRC must have examined the particulars of a scheme, and decided that it is taxed and regulated as a pension in its own country.

However, it is a mistake to think that the HMRC endorses or recommends these schemes. They are merely arrangements that the HMRC deems as proper pensions. The consequences of choosing a scheme that is not approved by are severe, as the taxman assumes that you have selected a rogue scheme for tax evasion. Penalties of up to 55% of the value of the fund are at his disposal for this indiscretion.

QROPS are often sold on their tax advantages. Once a UK pension has been transferred to a QROPS, no UK tax is payable as long as the individual remains a resident for tax purposes outside of the UK for at least five years. Tax residency is a tricky area, and recent case law means that individuals need to take professional advice to avoid being caught in the taxman’s net.

Whilst the QROPS will be caught by the tax jurisdiction in which it finds its new home, this is not a problem if your QROPS adviser recommends a place with a favourable tax regime.

When people talk about tax, their focus is typically on income. But inheritance tax should also be part of your retirement planning, and QROPS can certainly help with this. Some QROPS countries permit the tax free distribution of assets directly to beneficiaries.

Finally, give that investors have so many schemes in so many countries to choose from, they may find that a QROPS can give more flexibility and choice of underlying assets than a UK scheme.