A qualified recognised overseas pension scheme (QROPS) can offer significant tax advantages for UK expats, including exemption from UK inheritance tax and flexible investment options.
However, recent Overseas Transfer Charge (OTC) rule changes mean that the benefits of a QROPS are now largely dependent on where you reside.
As you approach retirement, you may be wondering, “What happens to my QROPS after I die?” This guide explains how your QROPS is taxed upon death, the key factors influencing taxation, and the rules governing withdrawals. We’ll also provide advice on minimising death taxes on a QROPS and outline its withdrawal rules to help you avoid penalties.
What You Will Learn
- What happens to the money in your QROPS after you die?
- How should you crystalise your QROPS, and how is your QROPS taxed upon death?
- How can you reduce the QROPS tax on death benefits?
- Which QROPS withdrawal rules should you be aware of to avoid penalties?
QROPS Death Benefits and Inheritance Rule
When you die, your QROPS funds go to your beneficiaries. However, the tax-free amount your beneficiaries can obtain is typically limited to £1,073,100. This is the lump sum and death benefit allowance (LSDBA). The LSDBA can also reach 1.8 million if you hold a protected allowance.
When you’re under 75, your LSDBA consists of:
- Uncrystallised funds lump sum death benefit: A direct withdrawal from your QROPS pot after the age of 55
- Annuity protection lump sum death benefit: A lump sum your beneficiaries get if you die soon after purchasing an annuity, to cover the difference between your invested funds and the payments you’ve received
- Drawdown pension fund lump sum death benefit: The sum that remains in the drawdown fund after the monthly payments and investments, which your dependents get after your death
The list also includes lump sum death benefits regarding serious ill health and pension protection, as well as an individual lump sum allowance (LSA). The LSA is limited to £268,275, and it is the amount you can take from all your pension schemes as tax-free cash during your life.
Why Does Crystallising Your QROPS Matter?
If you’re approaching age 75, you’ll be required to crystalise your entire QROPS fund. This means you must withdraw your pension, which you can do by either:
- Starting to take it as income taxed at a marginal income tax rate
- Taking a pension commencement lump sum (PCLS) free of UK tax
PCLS refers to a sum you can withdraw tax-free once you turn 55. Since 6 April 2023, you can take 25% or 30% (depending on the QROPS jurisdiction) of your QROPS fund free of UK tax on the first £1,073,100. The remaining 75% is taxed according to the double taxation treaty between the QROPS jurisdiction and your country of residence, or at your marginal income tax rate if no treaty applies.
Typically, QROPS users choose to receive the 75% as a flexi-access drawdown or an annuity. However, some jurisdictions, such as Guernsey, do not offer these options.
Before deciding how to crystallise your pension, consider the following pros and cons of taking the maximum PCLS amount:
| Benefits | Drawbacks |
|---|---|
| You can withdraw a large portion of your pension pot tax-free. | Removing funds from the pension wrapper and reinvesting it can lead to capital gains tax. It also leaves you and your beneficiaries without regular retirement income. |
| It allows you to use the money for anything you want. You can pay off debt, reinvest the funds, or use a part of your pension fund for larger expenses like purchasing a car. | Since QROPS funds are currently exempt from inheritance tax (IHT), removing your pension from a QROPS may subject it to IHT. |
You should also consider the rules of your QROPS jurisdiction when crystalising your pension. For example, if you hold your QROPS in a popular location like Malta, some QROPS trustees allow only one chance to access your PCLS of 25% or 30%. If you don’t take the entire sum when the opportunity arises, all further payments are liable to income tax depending on the country you are a resident of.
How Is QROPS Value Taxed After You Die?
The taxation of the QROPS value depends on:
- Your age when you die
- Your residency at the time of death
- Your beneficiaries’ residency
- The way the money is paid to your beneficiaries
Generally, the following taxation rules apply:
| Death Payment Time | Your Age Upon Death | QROPS UK Tax |
|---|---|---|
| Within 10 years of transferring a QROPS | Less than 75 | The payment must be reported to HMRC according to the QROPS ten-year rule, and the funds may be subject to UK taxation. |
| When you’ve been a UK non-resident for over 10 consecutive years | Less than 75 | Your beneficiaries get 100% of the remaining funds free of UK tax. |
| When you’ve been a UK non-resident for over 10 consecutive years | 75 or older | Your beneficiaries must pay UK tax at their marginal rate on any withdrawal from the QROPS. |
If you die before turning 75, based on the death benefit rules introduced on 6 April 2015, no UK tax applies to your QROPS fund whether your beneficiaries:
- Take the funds as a lump sum
- Use the money to buy an annuity
- Withdraw funds from a drawdown account
How To Minimise Death Taxes on a QROPS
While your beneficiaries may not be able to avoid the taxation of death benefits, you can reduce taxes your beneficiaries must pay on your QROPS after your death in two ways. You can either:
- Transfer funds to another QROPS
- Transfer funds to a SIPP
Transfer Funds to Another QROPS
If you’re survived by your spouse, a QROPS trustee may allow an in-species transfer to another QROPS. An in-species transfer refers to transferring the ownership of your QROPS to your spouse in its current form, with no need to convert it to cash and potentially incur income tax.
If you choose this option, your spouse can begin receiving income payments immediately if they are 55 or older. If they are younger than 55, QROPS rules apply again, and they can access the benefits once they are of pension age.
Transfer Funds to a SIPP
This first option isn’t ideal in all circumstances, especially if you leave your QROPS to grandchildren as they likely won’t be able to access it for a long time without incurring income tax. In such cases, you can consider transferring your QROPS to a self-invested personal pension (SIPP) in the UK.
SIPPs are tax-efficient retirement savings accounts that typically include:
- Lower fees than QROPS
- No hidden fees
- More investment options like stocks and bonds
- Withdrawal flexibility
Transferring your QROPS funds to a SIPP would allow your beneficiaries more control over how they withdraw your pension when you die. They can:
- Withdraw it as a large one-off payment, but this can incur high taxes depending on your residency.
- Receive it as income to avoid high tax rates
- Take the money once they’re retired to reduce taxes
However, they can also leave the money invested to create a family trust and pass on the remaining funds to future generations. However, with the expected changes to UK Inheritance Tax (IHT) in 2027, the tax treatment of QROPS upon death may become less favourable.
Future reforms could impact the ability to pass on pension funds tax-efficiently, potentially subjecting them to higher tax liabilities depending on residency and the structure of the inheritance.
It’s crucial for expats to stay informed about these upcoming changes and review their pension strategy to ensure their QROPS remains a tax-efficient solution for intergenerational wealth planning.
What Are the QROPS Withdrawal Rules?
You can only make a QROPS withdrawal without incurring penalties once you turn 55. If you take funds from your pension pot before the age of 55, you’ll face a QROPS early withdrawal penalty of at least 40% of the withdrawn amount. You may also face up to a 15% surcharge if the amount you withdraw is higher than 25% of the pension value.
You can only make a tax-free early withdrawal in case of serious ill-health. Regardless of age, you can receive a serious ill-health lump sum from the pension fund if you have written evidence issued by a registered medical practitioner that your life expectancy is less than a year.
Still, the best way to ensure you can withdraw your QROPS funds without facing tax charges is to speak to a pension transfer professional.
Key Takeaway
Learning what happens to your QROPS after you die can help you manage your wealth. It allows you to pass on most or all of your wealth to your beneficiaries while minimising tax liability.
In this guide, we’ve explained the death benefits and inheritance rules related to your QROPS pension pot once you die. We’ve highlighted the significance of the lump sum and death benefit allowance for pension withdrawals—both during your lifetime and after your passing—and we have outlined the importance of crystalising your pension.
The guide examined the QROPS taxation rules upon your death, focusing on the impact of your age and residence on fund taxation. We’ve also provided advice on reducing death taxes on a QROPS by suggesting a pension transfer to another QROPS or a SIPP.
To ensure you avoid withdrawal penalties if you need to withdraw from your QROPS fund early due to illness, we’ve covered QROPS withdrawal rules, highlighting the age limits and ill-health lump sum exceptions you should know.
At Titan Wealth International, our experts can review your current QROPS structure and suggest improvements to help you reduce tax liability and maximise the growth of your pension pot. They can manage your investment portfolio and help you make necessary changes, ensuring the enhanced strategy aligns with your retirement goals.
