QROPS Withdrawal Rules—Type of Withdrawals, Age Requirements & Tax Implications

Understanding the complex QROPS rules and regulations is crucial to ensure tax compliance and maximise the growth of your pension pot. Becoming familiar with withdrawal rules is especially important because breaching them can result in significant penalties.

In this article, we’ll explain QROPS withdrawal rules, focusing on age limits, taxation of pension income, and reporting requirements. We’ll also outline how you can withdraw your pension and cover the impact that lifetime allowance (now replaced by lump sum allowance) and currency changes may have on QROPS withdrawals.

When Can I Withdraw Funds From a QROPS?

According to His Majesty’s Revenue and Customs (HMRC) rules, you must be 55 to access your QROPS.

If you withdraw from your pension pot before turning 55, you’ll face a tax charge of up to 40% of the withdrawn sum. You can also be charged an additional 15% if you withdraw more than 25% of your pension pot. This is because withdrawals made before age 55 are considered unauthorised withdrawals.

You may be allowed to make a QROPS withdrawal before turning 55 in case of ill health. If you meet HMRC conditions, you can receive a substantial lump sum. Other exceptions allowing you to take a tax-free lump sum from a QROPS before age 55 are:

1. Having a life expectancy of less than a year while your pension is under a lifetime allowance

While 55 is the current limit, the normal minimum pension age (NMPA) should increase to 57 on 6 April 2028.

What Are the UK Tax Implications of Accessing Your QROPS Pension?

The taxation of your QROPS withdrawals in the UK depends on your residency status for tax purposes. Typically, you’re not liable for UK tax on your pension withdrawals if:

1. Your funds were built up and transferred to a QROPS before 6 April 2017 and at the time the payment is made, you are not UK resident, and have not been UK resident earlier in the tax year or in any of the previous five tax years.
2. Your funds were built up and transferred to a QROPS after 5 April 2017 and at the time the payment is made, you are not UK resident, and have not been UK resident earlier in the tax year or in any of the previous ten tax years.
3. For payments made in respect of a transfer occurring after 5 April 2017, you will not be liable to UK tax if the withdrawals take place at least five years after the transfer (assuming non-UK resident).

Generally, if you’re considered a UK tax resident, your QROPS withdrawals will be subject to UK tax at a marginal income tax rate. However, you’ll only be taxed on funds that exceed the tax-free lump sum allowance, which is typically 25% of the fund.

If you’re a resident of a foreign country, you may be liable for foreign income tax on QROPS withdrawals, but the tax rates and rules vary depending on the QROPS jurisdiction.

If your country of tax residence has a Double Taxation Agreement (DTA) with the jurisdiction of the QROPS and the agreement includes pension-specific provisions, it may prevent double taxation on your pension benefits.

Do You Need To Report QROPS Withdrawals?

Yes, your QROPS provider must report all QROPS payments to HMRC for 10 years after you transfer your UK pension to a QROPS. This includes any unauthorised withdrawals, such as retrieving funds from the pension scheme before the age of 55. If you don’t comply with these QROPS withdrawal rules, you may face tax charges of 40–55%.

What Is Lifetime Allowance, and How Does It Affect QROPS Withdrawals?

Lifetime allowance was the maximum sum of £1,073,100 that you could build up in a UK pension pot without incurring UK taxes. On 6 April 2024, the lifetime allowance was replaced by:

1. Lump Sum Allowance (LSA): Limited to £268,275 or 25% of your pension pot, the LSA is a lump sum you can withdraw from your QROPS tax-free.
2. The Lump Sum and Death Benefit Allowance (LSDBA): An amount of up to £1,073,100 your dependents can withdraw tax-free when you die.
3. Overseas Transfer Allowance (OTA): Equal to the LSDBA amount, the OTA is the maximum sum you can transfer overseas without paying the Overseas Transfer Charge (OTC), which is 25%.

To ensure tax compliance when transferring your pension, make sure you speak to a professional QROPS adviser.

How Can I Withdraw Money From a QROPS?

Once you turn 55, you can typically withdraw your pension as:

1. Pension commencement lump sum.
2. Flexi-access drawdown.
3. Capped Drawdown Income.
4. Annuity.

Pension Commencement Lump Sum

A pension commencement lump sum (PCLS) is the amount of a QROPS fund you can withdraw tax-free when you decide to crystallise (access the fund to take retirement benefits) your pension.

Since 6 April 2023, you’re allowed to take 25% of your pension pot as a tax-free lump sum on the first £1,073,100. Depending on your QROPS jurisdiction, the PCLS amount can be up to 30%.

If you decide to take your pension as a PCLS, the remaining 70–75% of your pension savings will be taxed at your marginal income tax rate. The marginal tax rate depends where you are resident, and typically is tiered based on your income amount.

The main QROPS pros and cons of withdrawing your pension as a PCLS are:

Flexi-Access Drawdown

A pension drawdown—or a flexi-access drawdown—is a flexible method of withdrawing your pension income when you retire. If your QROPS offers this withdrawal option, you can opt for:

• A full drawdown: Move your entire pension pot into income drawdown and withdraw 25% tax-free, leaving the remaining money invested and allowing it to keep growing.
• A phased (or partial) drawdown: Periodically transfer portions of your pension to an income drawdown, withdrawing 25% of each portion tax-free. Repeat the process as needed.

Besides leaving the funds in a pension pot, you can also invest them in stocks, bonds, and mutual funds. Since riskier investments, like company stocks, may lead to financial losses, consider speaking to a financial adviser before you start investing.

A few pros and cons of a flexi-access drawdown that you should consider include:

Annuity

Once you retire, you can purchase an annuity—a contract with an insurance company that provides your retirement income. Generally, when you buy an annuity, your pension pot is converted into steady income you’ll receive during your retirement.

The amount of income you get each year depends on the sum of money you invest. An annuity return rate is typically around 6%, calculated on every £10,000 invested. For example, if you invest £10,000, your yearly income will be £600.

The types of annuities you can buy include:

• Fixed-term annuity: Offers guaranteed income for a set period, typically 5–10 years. When the annuity matures, you receive the lump sum you invested and any gains you earned, minus the paid-out income.
• Lifetime annuity: Provides guaranteed life-long income and is suitable for those with low-risk tolerance. You can also buy an annuity that increases every year to stay protected from inflation.
• Enhanced annuities: Suitable for individuals who need higher retirement income due to serious health conditions like cancer, stroke, and diabetes. The annuity rate you get will depend on your estimated life expectancy, calculated based on your medical information.
• Investment-linked annuity: Allows you to invest a part of your funds and receive another part as guaranteed income. The invested funds’ value depends on the investment’s performance. If the investments perform well, you will receive more income, and if they decrease in value, you will get the minimum guaranteed amount you previously chose.
• Purchased life annuity: An annuity you can buy with the pension tax-free lump sum or using the funds outside your pension pot. You don’t have to pay tax on the invested funds, but you must pay tax on any interest you earn.

The Main Benefits and Drawbacks of Using Your QROPS Money To Buy an Annuity

Some of the main benefits and drawbacks of using your QROPS benefits to purchase an annuity include:

You can also withdraw the PCLS, use a portion of your pension to buy an annuity, and move another part of it to a flexi-access drawdown. However, before deciding how you want to withdraw your QROPS pension, consult with a pension adviser like those at Titan Wealth International.

Capped Drawdown Income

Capped drawdown is a pension income option that allows individuals who entered into this arrangement before 6 April 2015 to withdraw a regular income from their QROPS while keeping their pension pot invested.

Unlike flexi-access drawdown, capped drawdown limits the annual amount you can withdraw, based on Government Actuary Department (GAD) rates.

GAD rates are calculated using annuity rates and your age. The maximum annual withdrawal is 150% of a comparable annuity income.

If you are under 75, this limit is reviewed every three years. For those aged 75 or over, it is reviewed annually.

The Key Features of Capped Drawdown

1. Not available for new applicants: Since 6 April 2015, capped drawdown has been closed to new entrants. Only individuals who set up capped drawdown before this date can continue using it.
2. Tax-free lump sum: Before entering capped drawdown, individuals could withdraw up to 25% of their pension pot as a tax-free lump sum.
3. Income limits: Withdrawals are capped at 150% of GAD rates, helping to manage longevity risk.
4. Investment potential: The remaining pension pot stays invested, meaning it has the potential to grow, but is also subject to market fluctuations.
5. Review process: Withdrawal limits are reviewed based on your age: every three years if you are under 75 and annually if you are over 75.

The Pros and Cons of Capped Drawdown

If you exceed the capped drawdown limit, your pension automatically converts to flexi-access drawdown, where income restrictions are removed. However, this triggers the Money Purchase Annual Allowance (MPAA), which reduces your annual pension contribution limit from £60,000 to £10,000.

Capped drawdown remains a suitable option for those who set it up before 6 April 2015 and want a controlled income while keeping their pension invested.

However, if you are considering flexible pension withdrawals, you may wish to explore flexi-access drawdown. To understand the best approach for your retirement planning, consult with a professional QROPS adviser.