QROPS, otherwise known as Qualifying Recognised Overseas Pension Schemes, have been around since 2006. As the name suggests, they are an overseas pension scheme that has been set up in such a way that it is deemed as “qualifying” by HMRC.
They are usually based in tax beneficial regions such as Gibraltar, Malta, Cyprus and other countries with a less aggressive approach to tax to attract investment.
The scheme rules, the security of the funds, investment options and cost of administration are all virtually the same as in the UK. Funds are held in designated client accounts that are protected against the country the scheme is registered in and can be invested here in the UK once set up.
Should you decide to transfer your pension to a QROPS the value of the pension would be tested against the pension lifetime allowance at the point of transfer. If the pension value is below the pension lifetime allowance no charge would be due.
If your pension does exceed the lifetime allowance a one-off charge of 25% of the excess would be due when the transfer is made. Once the balance of the funds has been received by the QROPS no other pension lifetime allowance rules apply.
Tax-Free Lump Sum
Under pension freedoms in the UK, you are entitled to take 25% of your pension fund as tax-free cash when you retire. This is limited to 25% of the prevailing or protected lifetime allowance.
Tax-free cash is still available using a QROPS at 25%, and at 30% in some jurisdictions. However, this is based on the full value of the fund, not limited by the prevailing lifetime allowance.
For higher value pensions this can be advantageous, due to the increase in tax-free cash that would be available.
Income from a QROPS
As a UK resident, the income will be taxed in the same way as any other UK pension scheme. You still have the full use of your personal allowance, and basic and higher rates of tax remain the same.
Should you live abroad, the tax will be paid subject to the rules in the country of which you are tax resident.
Inheritance tax & QROPS
Under pension freedoms, the rules are similar, however, somewhat more advantageous through a QROPS.
If death should occur:
Pre-age 75 – Under UK rules the value of the regular pension pot can be paid out tax-free to the beneficiaries. This is limited to the prevailing or protected lifetime allowance. Any excess will still be charged as lifetime allowance at either 25% or 55%, and paid by your estate.
With a QROPS this is not the case. The entire value of the pension can be paid tax-free.
Post age 75 – Under UK law the pension fund is inheritance tax-free. However, income tax is paid on any withdrawal from the pension.
QROPS is very similar, with the beneficiaries paying income tax on any withdrawals. However, there may also be the option of some tax-free cash. The original value of the transfer to the QROPS, plus any tax-free cash and income taken are deducted from the gross value of the fund at the time death occurs. Any excess can be paid as tax-free cash to the beneficiaries.
Can you use a QROPS if you are a UK resident?
The common understanding is that UK residents cannot use the schemes. However, after recently conducting our own due diligence we concluded that there is nothing in the legislation that excludes UK residents from using one.
This was recently confirmed by the independent government body, the Pensions Advisory Service who also confirmed that QROPS can be used by UK residents.
For more information on QROPS and some efficient ways to use them in your pension planning feel free to contact a member of our team.
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