Discover the pros and cons of transferring your UK pension to a QROPS when moving abroad, including eligibility, taxes and the cost of QROPS pension transfers.
More than half a million British citizens who move abroad each year face the question of whether to leave their pension funds in a British plan or transfer them to a Qualifying Recognized Overseas Pension Scheme (QROPS) in their new country.
In this guide, financial and pension expert Russell Hammond of AES explains the benefits and drawbacks of QROPS, including details of how to transfer your pension and obtain reliable independent financial advice.
This guide to UK pension transfers for expats includes:
- What is a QROPS?
- Should I transfer my pension to a QROPS?
- Advice on switching to a QROPS
- Charges on transfers
- British pension taxes and transfers
- British pension freedoms and QROPS
- Changing investment arrangements, QROPS company, or trustee
- Transferring your pension to a non-QROPS
- Transferring your QROPS pensions back to the United Kingdom
- Should I leave my pension in a British plan?
- Useful resources
AES is an award-winning global financial advisory organization that provides high-quality, personalized financial advice to expats from retirement planning and pension transfers to insurance, savings, and investments.
What is a QROPS?
“It all started in 2006 with the UK government’s wish to simplify what was a confusing mismatch of pension rules that had been amended by each successive governmental administration”, explains Russell. “While there was a recognized need to maintain the existing regime to protect UK tax revenue, there also was a cross-party consensus that the pension landscape needed to be simplified.”
Thanks to this UK pension industry spring cleaning, British nationals moving abroad can transfer their pensions to an overseas scheme that meets specific criteria set out by the British tax agency, HM Revenue and Customs (HMRC). HMRC refers to this scheme as a QROPS. This scheme coupled well with recovery efforts in the wake of the 2008 financial crisis, when governments the world over started to recognize the need for protecting the hard-earned investments of individuals.
Since the launch of QROPS in 2006 until the end of the 2017–2018 tax year, more than £10.7 billion was sent in 123,000 transfers, at an average of £898 million per year.
To qualify as a QROPS, a pension scheme must meet various requirements set out by British law. For example, funds in qualifying schemes must only be accessible beyond the age of 55, unless there are special circumstances.
Not all overseas schemes meet the criteria set by the British government. On its website, HMRC publishes an updated list of qualifying countries and specific schemes that have QROPS status. HMRC updates this twice per month.
Countries with QROPS
Currently, schemes from 29 countries have QROPS accreditation.
These include a host of countries across Europe, as well as the United States and Australia. There are some notable exceptions, however, such as France, Spain, and Portugal; regulations may also change after the United Kingdom leaves the European Union. Expats moving to these countries are able transfer to a QROPS in a neighboring country in the European Economic Area.
The countries currently providing QROPS are as follows: Australia, Austria, Barbados, Belgium, Bulgaria, Denmark, Finland, Germany, Gibraltar, Guernsey, Hong Kong, India, Ireland, Isle of Man, Jersey, Kenya, Latvia, Liechtenstein, Luxembourg, Malta, Mauritius, Netherlands, New Zealand, Norway, South Africa, Sweden, Switzerland, and the United States.
Should I transfer my pension to a QROPS?
Before transferring your retirement funds, it’s important to weigh up your options; take independent financial advice tailored to your specific circumstances.
Benefits of transferring to a QROPS
For some retirees, a QROPS makes sense. The advantages of transferring can include the ability to consolidate your pensions into a single scheme, making them easier to manage and in some cases saving you money on fees.
Having all of your pensions in one scheme abroad keeps your finances in one currency. This avoids fluctuating exchange rates (though the pound is likely to fluctuate more wildly after Brexit). This could also minimize your tax liability depending on the taxation regime in your new country.
Other benefits include:
- Greater flexibility for investing money than British pensions
- Transparency over fees and charges
- No requirement for your beneficiary to pay tax on your pension if you die while living overseas (over the age of 75)
Drawbacks of transferring
On the other hand, a QROPS isn’t the right product for everyone. Some expats have been left short-changed by switching.
Russell Hammond of AES says that poor advice on QROPS in its early years resulted in “countless clients holding arrangements that are ill-suited to their individual circumstances.” For example, by transferring, you’ll lose any benefits that come with your British pension; for some, this includes a secure income or guaranteed annuity rates.
Other drawbacks can include:
- A loss of protection from the Financial Conduct Authority (FCA) in the United Kingdom
- The need to pay set-up and maintenance costs
- The prospect of moving to a different scheme if your country loses QROPS status
Advice on switching to a QROPS
Before transferring your British pensions to a QROPS, it’s vital to take independent financial advice. This is especially important given the checkered history of the advice given to some customers who transferred their pension funds abroad.
Russell says that “for the right individuals in the right circumstances, there can be some considerable tax and investment advantages to transferring to QROPS.” However, he also deplores that “demand for QROPS created a new group of newly-minted financial salespeople who were, for the most part, unqualified and unregulated. These were more focused on generating commissions rather than providing clients with a suitable, effective overseas pension investment solution.”
“This did not turn out well for many who made the decision to transfer,” adds Russell.
How to choose a financial adviser
When searching for a financial adviser, Russell recommends following these steps:
1. Check the adviser’s qualifications
It’s important to work with an accredited financial adviser who will offer you impartial, expert advice tailored to your personal circumstances. The Chartered Insurance Institute awards Chartered Financial Planner status to advisers who have the appropriate qualifications.
2. Choose fee-based rather than commission-based advice
Russell says that it’s vital to choose an adviser who charges on a fee-only basis. He says this “ensures you receive advice throughout the process, not just the beginning – and allows you to change adviser if you’re unhappy with the guidance you’re receiving”.
You should insist that your adviser structures your scheme with no minimum investment period and no lock-in or exit fees. Russell says that “a QROPS is a long-term financial undertaking which not only needs to be set up properly initially, but also tracked and managed as market conditions develop and a client’s circumstances evolve.”
3. Ensure your provider has adequate insurance
You should always make sure your adviser has appropriate indemnity cover or adequate capitalization to cover you in the unlikely event of something going wrong.
Charges on transfers
The UK levies a charge of 25% on transfers to QROPS in other countries. There are some exceptions, which allow expats to make tax-free transfers. These include the following:
- You are a resident in the country where the QROPS receiving your transfer is based
- The QROPS you’re transferring to is an occupational pension scheme and you are an employee of a sponsoring employer
- The QROPS is a pension scheme of an international organization or overseas public service scheme with whom you’re employed
Reclaiming a transfer fee in 2019
In April 2019, HMRC made it easier for people to reclaim overseas pension transfer charges if they were erroneously paid or if circumstances changed that made the original transfer exempt. While it’s always been possible to reclaim these charges in theory, the 2019 regulations have formalized the process of claiming a refund.
To claim a refund, you’ll need to write to HMRC with the following details:
- The date and amount of the transfer
- The date the charge was paid to HMRC
- The circumstances for exclusion from the charge and the date the exclusion should be applied from
- The sum claimed
British pension taxes and transfers
When transferring to a QROPS, you still have a 10-year reporting requirement to HMRC. Should you break the QROPS rules (such as accessing funds before the age of 55), you could face a tax charge of up to 55% plus penalties on your withdrawal.
There are some instances where pensioners can withdraw sums before the age of 55. These include: a serious ill-health lump sum, a short-service refund lump sum, a winding-up lump sum, or a refund of excess contribution lump sum (if you accidentally overpay into your pot).
For a QROPS opened before April 2017, customers need to have been a resident outside of the United Kingdom for at least five years before they retire or take benefits. HMRC extended this to 10 consecutive tax years in April 2017.
British pension freedoms and QROPS
In 2015, pension freedoms were introduced on defined contribution pensions in the United Kingdom. However, QROPS remained subject to a test where 70% of the fund had to be used to provide income for the rest of the customer’s life.
In April 2017, HMRC removed this rule, allowing users to have the same options as members of UK-registered pensions.
Changing investment arrangements, QROPS company, or trustee
If you’re currently holding a QROPS, and are either unhappy with the advice that you have received, looking to change QROPS advisor, or about to enter the income drawdown stage, what can you do to improve your situation?
Reassuringly, Russell says that “all is certainly not lost.” He explains that most of the investment products and wrappers that were used (and continue to be used) by international financial sales firms have a 5-10-year investment period, so once you are beyond this investment period you are able to completely switch out of your current investment arrangement into another that will provide a much better pension investment solution.
“Don’t despair if you are still within the exit penalty stage”, he says; “a fee-based advisor can still help with your QROPS”. An extra management fee will need to be applied, in addition to the fees that are already being charged. But fee-based advisors will almost always be able to cut other hidden fees, so the extra management fee that they charge can be recouped by other, sometimes significant cost savings. “They do this as their only agenda is to make you money,” explains Russell, “not to line their own pockets with commissions payable by the investment wrappers.”
Most fee-based international advisors are willing to provide a free QROPS Health Check; this allows you to understand, in simple terms, what you have and what improvements are possible.
Transferring your pension to a non-QROPS
If you do decide to transfer your pensions abroad, it’s important to make sure that the overseas scheme fits the QROPS criteria. Otherwise, you can be classified as making an unauthorized payment from your pension. This results in a tax charge of 55% and the possibility of incurring further penalties.
Transfers to non-accredited schemes may also be unregulated. This means you’ll lack protection and could struggle to gain compensation after the event.
With this in mind, be wary of fake schemes. Take financial guidance and never act on the basis of unsolicited contact.
Transferring your QROPS pensions back to the United Kingdom
If you have your retirement savings in a QROPS, you might be wondering what happens should you decide to move back to the United Kingdom further down the line.
You don’t have to transfer your savings back to a British scheme. If you choose to do so, HMRC will consider this to be a transfer rather than a contribution to a British pension scheme. When transferring back to the United Kingdom, some expats use a Self-Invested Personal Pension (SIPP), which can be useful if you plan to continue working and make tax contributions as a British resident.
If you’ve already made withdrawals from your pension while abroad and have lived outside of the United Kingdom for fewer than five years, the British government may consider your move as temporary. This could result in you needing to pay tax on these withdrawals. With this in mind, it’s best to take advice from a regulated financial adviser at the onset and be clear over your future plans, should you intend to return to the UK at a later date.
Should I leave my pension in a British plan?
An alternative to QROPS is to simply leave your pensions in British plans rather than transferring them into an overseas scheme. If you choose this option, you’ll be taxed on pension income in the UK. However, there is an exemption if you live in a country with which the United Kingdom has a dual taxation agreement.
In the United Kingdom, savers can access 25% of their pension funds as a lump sum from the age of 55. After this, pensioners receive a continuing pension either through their scheme or annuity.
Whether you’re better leaving your pensions in the United Kingdom depends on the specifics of your situation. For example, those with defined benefits (e.g., final salary schemes) already enjoy some of the most generous pension terms possible. As such, transferring into a QROPS means losing the right to a guaranteed income for life.
For some savers, external considerations will be important too. For example, you might wish to choose the best option for succession planning, or you might have concerns about the long-term viability of your current fund and wish to switch elsewhere.
The following websites offer contact details, advice, and support for UK nationals seeking guidance on their pension options.
- QROPS provider list: British government list of all countries with QROPS-accredited schemes and details of each qualifying scheme.
- QROP scheme rules: British government explanation of the rules QROPS providers must meet.
- UK pension service contacts: list of phone numbers and government departments who can help you with your pension.
- Pension Wise: impartial government advice on defined contribution pensions.
- Money Advice Service: government-supported financial and pension advice, including a British pension calculator.
- Pensions Advisory Service: government-sponsored advice on occupational and private pensions.
- Action Fraud: fraud and cyber-crime reporting agency.
- Unbiased: directory of Independent Financial Advisers in the United Kingdom.
After working as a stock broker in London, Russell Hammond started advising expatriates and internationals on financial planning, investments, and pension transfers in 2005. As a Chartered Fellow of the Chartered Insurance Institute and Chartered Member of the Chartered Institute for Securities and Investment, Russell provides high quality, fee-based, advice to his diverse international clientele.Contact Russell