QROPS Benefits & Drawbacks To Consider Before Transferring Your Pension Overseas

A qualifying recognised overseas pension scheme (QROPS) is among the most popular options for UK expats as it brings various tax advantages, better investment options, and flexibility when accessing the funds. Still, this pension plan also includes several drawbacks you should consider before deciding on a pension transfer.

In this guide, we’ll explain the main QROPS benefits, outline a few potential drawbacks that should be considered, and advise you on the steps to take if you’re dissatisfied with your current QROPS.

QROPS Advantages and Disadvantages—An Overview

Transferring your UK pension to a QROPS can help you manage your pension effectively, enjoy tax benefits, and preserve more wealth. However, familiarising yourself with the potential disadvantages of moving your pension to a QROPS is essential for determining whether the pros outweigh the cons in your specific circumstances.

Some of the main QROPS benefits and drawbacks include:

The Benefits of a QROPS—Explained

While the overview above should give you a general idea of what you can expect when transferring your pension to a QROPS, to make the right decision, it’s important to understand the details. In terms of taxation and wealth preservation, QROPS benefits include:

1. Currency risk reduction
2. More investment options
3. UK inheritance tax advantages
4. Double tax treaties
5. Overseas transfer allowance
6. Pension Commencement Lump Sum
7. Lump Sum Allowances

Currency Risk Reduction

If you live in the country where your QROPS is located, you can withdraw your pension in a local currency. This allows you to avoid income conversion charges and exchange rate risks, resulting in increased savings growth and easier financial management.

More Investment Options

When contributing to a QROPS, you’re not restricted to a limited fund range offered by a particular insurance company. Instead, you have access to funds managed by the world’s leading investment groups and are typically allowed to invest in assets like:

• Cash deposits
• Collective investment funds
• Government and corporate bonds
• Equities
• Commercial property

This investment flexibility allows you to create a diverse portfolio that best suits your specific circumstances and risk tolerance.

Speaking to a pension transfer adviser is the safest way to ensure you choose the best investments and grow your wealth efficiently. Experts at Titan Wealth International can evaluate your QROPS performance against industry benchmarks, assessing your investment choices to pinpoint areas for improvement and help you stay aligned with your retirement goals.

UK Inheritance Tax Advantages

Starting from April 2027, the death benefits provided to your beneficiaries as part of pension schemes will be considered a part of the estate and liable for IHT. This means the trustees will have to report death benefit payments to HMRC and pay tax on them.

As it stands, the provision announced in Autumn Budget 2024, applies to UK-registered pension schemes and Qualifying Non-UK Pension Schemes (QNUPS)—but not QROPS. Your QROPS still doesn’t count as an estate in the UK, meaning it’s exempt from the UK inheritance tax (IHT). This allows you to pass the full value of your pension to your loved ones after you pass away.

Depending on your QROPS jurisdiction, your pension scheme may be subject to local taxation laws, which is why many expats choose to keep their QROPS in countries with favourable tax laws, like Malta and Gibraltar.

Double Tax Treaties

If you’re a UK non-resident for tax purposes, your QROPS typically isn’t subject to UK taxation. However, if you’re considered a UK tax resident, your QROPS will likely be liable for UK tax, which means that your pension may be taxed by both the UK and your QROPS country.

If the country where you hold your QROPS has a double taxation agreement (DTA) with the UK, you may be exempt from double tax on your pension income. The UK has a DTA with numerous countries, including:

• Spain
• Portugal
• Gibraltar
• Malta
• Australia
• America

In case your QROPS country is on the list, the DTA will contain clear rules determining which country is entitled to tax pension income and under what conditions.

Overseas Transfer Allowance

On 6 April 2024, HMRC introduced the Overseas Transfer Allowance (OTA), an alternative to the Lifetime Allowance (LTA). The LTA allowed individuals to grow their pension fund up to £1,073,100 without incurring tax charges. The OTA serves a similar purpose as the LTA and retains the £1,073,100 limit for the 2024/25 tax year.

It’s important to note that every transfer to a QROPS reduces the remaining allowance. If the transfer exceeds the £1,073,100 limit, the excess amount will be subject to a 25% tax charge.

Pension Commencement Lump Sum

The pension commencement lump sum (PCLS) is the amount of money you can withdraw tax-free when you choose to withdraw your pension benefits. In certain jurisdictions, such as Malta, the lump sum you can withdraw tax-free can be as high as 30%.

However, the exemption from UK tax applies only to 30% of the first £1,073,100. The rest is taxed at your marginal income tax rate.

Lump Sum Allowances

A QROPS includes a lump sum allowance (LSA) of up to £268,275, or 25% of all your pension pots, which you can take as a lump sum free of UK tax.

Also, your beneficiaries can withdraw up to £1,073,100 of your pension pot tax-free after your death. This is called the lump sum and death benefit allowance (LSDBA). If the sum they withdraw exceeds the LSDBA limit, the excess will be taxed at their marginal income tax rate.

The Drawbacks of a QROPS—Explained

Before you transfer your UK pension to a QROPS, there are several potential disadvantages to be aware of, depending on your individual expectations. These include:

1. Potential loss of benefits
2. QROPS legislation conflicts
3. The ten-year rule
4. Potential tax charges

Potential Loss of Benefits

Depending on the pension scheme you’re transferring, you may be forfeiting certain benefits that you cannot regain later.

For example, defined benefit (final salary) pensions—traditional workplace pensions in the UK—offer cost-of-living adjustments that follow inflation rates and guaranteed income for life. These benefits only apply to that type of pension, and you can’t transfer them to a QROPS.

QROPS Legislation Conflicts

While many QROPS providers are located in European countries and are subject to EU pension regulations, QROPS established outside of Europe don’t have to comply with these regulations. This can cause two issues:

1. Disadvantageous foreign regulations: These regulations can include high tax charges, fees, and compliance areas that can negatively impact your retirement savings and make them difficult to manage.
2. Lack of effective regulation: You may be targeted by deceitful advisers, leading to financial malpractice.

It’s true that pension schemes recognised by HMRC must provide specific benefits and minimum requirements. However, those operating in certain foreign jurisdictions might have rules and regulations that don’t fully comply with HMRC.

The Ten-Year Rule

Previously known as a five-year rule, the ten-year rule was introduced on 6 April 2017. It states that you may be liable for UK tax on your pension if you return to the UK within ten years of your QROPS transfer.

Your QROPS provider must report any payments and unauthorised withdrawals you make during this period. If you withdraw money from the fund before turning 55 (outside of permitted circumstances such as ill health), you’ll be charged a 40% tax. You may be charged an additional 15% if the unauthorised payment exceeds 25% of the pension fund value.

While the above refers to UK tax residents, you can also be subject to UK taxation if you’re a UK tax non-resident and withdraw funds from the QROPS less than five years after a pension transfer.

Potential Tax Charges

Ensuring your chosen overseas scheme is recognised by the HMRC can help you avoid tax charge pitfalls from the very beginning. For example, if you transfer your UK pension to a non-QROPS pension, you must pay a minimum of 40% tax charge because the transition is treated as an unauthorised payment.

However, you may incur other tax charges when transferring your UK pension to a QROPS, and these include:

To minimise tax liability and avoid OTC when transferring your UK pension to a QROPS, consider speaking to a professional pension transfer adviser. They’ll provide tailored advice to help you preserve wealth and take advantage of the QROPS benefits you qualify for.