Wednesday, 11 November 2015

QROPS – The Definitive Guide

QROPS – The Definitive Guide (6th April 2016)

If you have a UK pension and plan to move abroad shortly or already live outside the UK then there is a good chance you have heard about or been approached about exploring a QROPS (Qualifying Recognised Overseas Pension Scheme). There is a lot of misinformation and outdated guidance on QROPS (especially since the significant recent changes to UK pension rules in April 2015), their comparisons to UK pensions and the benefits available under a QROPS.

The aim of this guide is to give you a full, clear and concise understanding of what QROPS is and how it compares to other options from an unbiased, independent viewpoint. It is vital that people do their own due diligence. Pensions are complex investments and in the offshore market in particular there are many advisers offering a QROPS to clients without having taken any UK pensions qualifications or understanding the suitability of an arrangement for a client’s circumstances. In many cases, especially since the changes in April 2015, people may now be better off with a UK or International SIPP rather than a QROPS.

What is a QROPS and what is a SIPP?

Qualifying Recognised Overseas Pension Scheme (QROPS)
This is an overseas pension scheme that HM Revenue & Customs (HMRC) recognizes as being eligible to receive transfers from registered UK pension schemes. This allows anyone with a UK pension who is living outside the UK or is intending to leave the UK to transfer their UK approved pension to an offshore jurisdiction without the deduction of UK tax. It cannot be used to transfer UK state pension benefits.

Self-Invested Personal Pension (SIPP)
This is the name given to a type of UK government-approved, UK based personal pension scheme, which allows individuals to make their own investment decisions from the full range of investments approved by HM Revenue and Customs (HMRC).

QROPS benefits

What are the benefits of moving a pension from the UK into a Qualifying Recognised Overseas Pension Scheme?

1.       Up to 30% tax free lump sum instead of 25% in the UK.

In the UK, when you begin to draw your pension you can take up to 25% of the value of your pension fund as a tax free lump sum payment. (Assuming the lifetime allowance, currently 1m, has not been exceeded). With a QROPS you can take up to 30% of the value of your pension as a tax free lump sum once you have been a non UK resident for 10 years (5 years if your pension was transferred to a QROPS before April 6th 2013).

2.       Pay tax in the country of your residency of choice

Pay less tax on your pension income. Most UK pensions are set up to pay pension income under the UK PAYE system where tax is automatically deducted before being paid, while you can elect to have this paid gross with HMRC it can be complicated. By transferring to a QROPS you can choose how, where and when you pay any income tax due on your pension. You may elect to have it taxed in your country of residence or in the QROPS jurisdiction itself where appropriate tax agreements exist to take advantage of lower tax rates.  

3.       Advantages for those with final salary schemes

A final salary scheme (or defined benefit scheme) are often associated with being generous and secure. There are, however, circumstances where you may wish to consider a transfer to a QROPS or alternative UK scheme.  Importantly: Final Salary transfers must be advised upon by a qualified professional holding the necessary UK Pension Transfer Qualifications and by a UK regulated firm holding the relevant license. Final salary pension transfers CANNOT be completed without a UK regulated firm being involved.

Reasons for consideration to transfer a final salary scheme into a QROPS include the risks of underfunded schemes not being able to pay out, many schemes are now sitting in an underfunded position with benefits being reduced year by year. The protection scheme only covers that 90% of your benefit will be protected with a cap of £32,761 per annum. 

If you have a big pension pot you can use QROPS as a way of passing down that wealth to your beneficiaries while avoiding Inheritance Tax.

Where you or your family are reliant on the income from a final salary scheme you may want to consider a transfer to an alternative scheme (SIPP or QROPS) to protect the income level you are receiving and the value of the pension fund itself.

4.       If you return to the UK only 90% of the pension income from a QROPS is liable for tax

Income from a QROPS is classed as income from a Foreign Pension Scheme which is taxable in the UK on 90% of the amount paid thus reducing UK tax bills in the event you return home.

5.       Test the pension value against the falling Lifetime Allowance now

The lifetime allowance for UK pensions states the maximum value of a pension fund before additional taxes become due. This has been reduced year on year since 2011 from a high of 1.8m to only 1m now and 750,000 from April 2017. If the lifetime allowance is breeched any excess is taxed at 55% when taken as a lump sum or 25% when taken as income with additional income tax also applied.

When transferring a UK Pension to a QROPS its value is tested against the lifetime allowance at the point of transfer.  Any future growth is then ireelevent for testing against the lifetime allowance and the pension can grow to any amount without incurring punitive UK taxes.  In particular it should be noted that as the LTA keeps on dropping each tax year, anyone with a pension close to the LTA or who think they may exceed the amount of 1m before retirement should take the opportunity to review their postion immediately.  If a transfer to a QROPS today is already above the LTA and there is no protection already applied to the pension any amount above 1m (for the 2016/2017 tax yr) will be subject to tax at 25% immediately.

6.       Tax Free Growth

Once your pension funds have been transferred into the QROPS scheme they will continue to benefit from tax free growth on any capital gains and income received within the pension.

7.        No 45% Income Tax charge on death

When a pension does not exceed the lifetime allowance and the pension holder is under 75 the value of any pension funds can be passed to beneficiaries without tax.

After age 75 pension benefits are subject to a 45% tax charge if paid as a lump sum to a beneficiary with this value likely to be amended to the marginal rate of tax payable by the nominated beneficiary from April 6th 2016. If paid as an income then benefits are free from tax other than income tax due at the beneficiaries marginal rates.

With a QROPS there will be NO income tax charge imposed on the payment of a lump sum to the member’s beneficiaries on death as long as the QROPS pension holder has been non-resident for at least 5 complete tax years. The beneficiaries have any number of options to choose from including lump sum payments, taking income or remaining invested.

In the UK, the new pension rules from April 6th 2015 have changed the death benefits on UK pensions. In summary, they are now:

Benefit type
Payment made on or after 6 April 2015
Uncrystallised, member dies before age 75
The beneficiary can take a lump sum up to the limit of the deceased’s remaining lifetime allowance, paid tax free, or take tax free income from flexi-access drawdown, or buy an annuity with payments paid tax-free.
Uncrystallised, member dies on or after age 75
The beneficiary can take income from flexi-access drawdown taxed at their marginal rate, or buy an annuity taxed at their marginal rate, or take a lump sum taxed at 45%
Crystallised (drawdown), member dies before age 75
The beneficiary can take income from flexi-access drawdown tax free, or buy an annuity, which will be paid tax free, or take a tax-free lump sum.
Crystallised (drawdown), member dies on or after age 75
The beneficiary can take income from flexi-access drawdown taxed at their marginal rate, or buy an annuity taxed at their marginal rate, or take a lump sum taxed at 45%

8.       Exchange rate risk

One of the big factors when living abroad can be the effect currency fluctuations can have on the value of your savings, investments and income and pensions are no different. UK pensions will be based in British Pounds – moving to a QROPS can allow you to hold alternative currencies within your pension to help reduce the effect of currency swings impacting your standards of living. Take the GBP / EURO rate over the last 10 years. If you had a pension paying 1,000 per month you would have seen your spending power reduced from 2005 to 2009 by 40% before rebounding back to where it started 10 years ago. By using a QROPS you can help alleviate currency risk by holding a mixture of currencies and using EURO denominated assets to produce the income in your country of residence.

9.        Portability & flexibility

Expats often find themselves requiring the flexibility to adapt to changes in their lives more often than someone who is based in the UK. UK pensions are structured for those people living and working in the UK – which is a very sensible approach!

This does mean that our needs as expats are often overlooked. QROPS are specifically designed for those with UK pensions that live abroad. They allow you to take your pension anywhere in the world while still providing the flexibility to manage the pension assets you have built up in a way that suits you. Most QROPS providers can also offer ransfers between different jurisdiction and often between SIPPS and QROPS themselves ensuring you can adapt to changes in your life and changes made by the UK government in the future.

10.    Benefit from Worldwide investment options

A QROPS can hold a huge range of investment assets. As well as including traditional assets such as stocks, shares and bonds they can also hold alternative assets such as hedge funds, cash, structured products, life insurance, physical commercial property, art, wine and classic cars should you so wish. Investments can also be made in multiple currencies without restrictions.

11.   Consolidation

Many clients have worked at more than one company during their working life and as such have often accumulated multiple pensions. Transferring into a QROPS can be a good way to consolidate all your existing pensions into one place to ease administration in the future. You will normally have online access to your pensions allowing you to clearly see the current status.

12.   Securing a spouses pensions

Where you have a final salary scheme or a scheme with a tied annuity rate you may find a QROPS can offer much better protection to you spouses income levels. A spouse’s pension will often only be 50% of the income received while the main pension holder is alive. By transferring to a QROPS that income can remain at the 100% rate for the spouse after the scheme member’s death. 

13.   Pension Income Tax Advantages

In the UK, the income received form a pension is taxable at the recipient’s highest marginal rate (up to 45%). For an expat or internationally mobile client, using a QROPS can allow you to combine the use of low tax rates in other countries and / or jurisdictions to pay significantly less tax on their pension income. By taking advantage of the new flexibility rules this gives clients the greatest possible chance of receiving their pensions free of tax that at any other time previously.

14.   Specialist advice on your pension assets

Someone’s pension can often be one of their largest financial assets. It makes natural sense to move the assets into a scheme where you can continue to receive sound advice on changes to legislation and understand how, when and why your pension is growing. Transferring into a QROPS or SIPP can help consolidate all your advice and focus on creating the pension scheme that works the way you want it to.

15.   Clean Break from the UK (particularly for IHT purposes).

By using a QROPS you move your UK based pension assets outside of the UK thus creating more of a clean break when it comes to working out domicile for Inheritance tax purposes.

16.   Taking retirement early from a final salary scheme.

Usually a final salary scheme will have quite severe reductions in the benefits paid to a scheme member when they wish to take benefits before the normal scheme retirement date.
Using a QROPS can help you crystalize a transfer value from the scheme now which can allow you to take your retirement early without being detrimental to your income levels or the tax free cash you expect to receive.

17.   Getting away from UK legislation

The UK government claims it is not looking at pensions as a way of raising tax; however, many of the moves made so far have been contrary to that fact. We have seen the lifetime allowance almost halved from 1.8m to 1m and the amount of money that can be added into pensions without being taxable reduced from over 250k to less than 50k over the last 6 years. Moving to a QROPS ensures that further pension changes will not have a negative impact on your pensions and allow you peace of mind to plan clearly for the future.  

18.   Good for a divorce

QROPS cannot have a pension sharing order attached to them in the event of a divorce settlement. Therefore, should you get divorced at some point, your spouse will have no rights to any benefits occurring under the QROPS scheme and your pension benefits will be protected.

QROPS vs SIPP or other UK pension

There were huge changes made to the way pensions work in the UK that came into effect from the 6th April 2016. This introduced full flexibility to schemes to pay out income, removed the requiredment to buy an annuity and the removal of the 55% death tax. These changes have removed some of the appeal that QROPS enjoyed previously, however, as shown above there are still many reasons why QROPS can be a good choice over a SIPP.

A QROPS and a SIPP are now more similar than ever, although for those living abroad a QROPS can still offer distinct advantages over a SIPP.

The table below shows the key differences that now exist between a QROPS and a SIPP to help you work out which is best for your circumstances. 

QROPS vs SIPP: General

Full name
Qualifying Recognised Overseas Pension Scheme
Self-Invested Personal Pension
A tax advantageous non UK jurisdiction
UK based 
Year introduced
Country of residence for qualification
No requirement to buy an annuity
No requirement to buy an annuity
Depends on Trustee
Depends on Trustee – usually slightly cheaper than QROPS
What if you return to the UK?
Depends how long you have been out of UK. Will usually fall back under UK rules but retaining some tax advantages
No changes

QROPS vs SIPP: Income and Lump Sum options

Before retirement
Up to 30% tax free pension commencement lump sum from age 55 (and in some cases as early as 50). Tax may be due in the country of residence.
25% lump sum free from UK tax after age 55. Tax may be due in the country of residence.
Before age 75
Flexible Income drawdown
Flexible Income Drawdown
After age 75
Flexible Income draw-down continues
Some policies may still force annuity purchase otherwise drawdown
Income tax
Flexible. Can choose to be liable for tax in country of residence or UK or QROPS jurisdiction where double tax agreements are in place
Tax will either be due in UK or country of residence depending on tax agreements in place.

QROPS vs SIPP: What happens on death

Inheritance tax
Not subject to UK inheritance tax (IHT)
No penalty
45% tax charge if taken as lump sum after age 75.

Key considerations:

-          How long will you be staying out of the UK? If less than 5 years = SIPP

-          How big is the pension scheme? Generally the bigger it is the more valuable a QROPS becomes

-          Do you want to protect income or pension value benefits of the scheme for your spouse / family members? If so, usually a QROPS

-          Remember, not all advisers offshore are available to advise on a SIPP and not all advisers in the UK are able to advise on a QROPS! So make sure you speak to someone who is qualified to give advice on UK pensions. Final salary transfers MUST be dealt with by a UK regulated firm.

Get unbiased advice on your money 


  1. I have a QROPS with Momentum in Malta. I have had the QROPS since 2011. I currently live in Dubai, however, i will soon be relocating to Sydney. Do i need to do anything with the QROPS before i change country? I can't ask my adviser as he no longer works for the company. Thanks, Mark.

  2. It could be advantageous to change your QROPS trustee in the above circumstances. If you wish to contact me we can discuss things further. Regards, Andrew.

  3. I have a pension with a QROPS already. My fund is around £105,000 but i feel like my fee's are very high. I was wondering if there was a way i could reduce them?

  4. This comment has been removed by the author.

  5. Hi, Without more specific information i wouldn't be able to say, however, generally if you are paying annual trustee fees to your QROPS provider that are more than £350 for a Lite QROPS or more than £750 for a regular QROPS then you are paying too much. Regarding other fees it depends what your underlying investment platform is that you are using, however, if you are paying more that 1.5% per annum you are paying too much (really you should be paying no more than 1% annually). You can change the underlying investments and / or the QROPS trustee for your pension so it may be worth exploring your options further. You can see a comparison of the major QROPS providers at

    If you want to discuss your specific circumstances please email me or use the contact form on the right had side of this blog.

  6. I have been advised that i should move my pension into a QROPS, however, after reading this i think a SIPP may be more beneficial, I am 40 years old and the transfer value is around 150,000 pounds. I live in Dubai at present but intend to relocate back to the UK within the next ten years - i think this means QROPS is more appropriate for me?

  7. I would imagine your adviser is probably not experienced enough to understand the difference between the different pension options available (and the fact he will get less commission via a SIPP probably doesn't help!). If you are sure you will return to the UK before the age of 55 you should definitely be considering a SIPP over and above a QROPS. It will be cheaper to run but give you exactly the same benefits as a QROPS under current rules. One thing you may want to consider is a SIPP trustee that has a QROPS offering so if you do decide to remain an expat you can move into a QROPS for free in the future. Happy to assist you further if needed: