Understanding Qrops and transfers from UK pensions

It was designed to allow individuals permanently living overseas to simplify their affairs and enable them to continue to save to provide an income for retirement by transferring their UK pensions to a pension based in their new country of residence.

The system was intended to limit the lump sum and pension benefits available to the transferring individual to be broadly equivalent to the benefits that would have been available to them had they left their pension in the UK. 

The government provides tax relief on contributions made to UK registered pension schemes, and investments made within those schemes are generally free from income tax and capital gains tax.

If a transfer is made from a UK registered pension scheme to a Qrops then, until recently, it has been free of tax (provided it does not exceed the individual’s lifetime allowance). More on this calculation later.

HM Revenue & Customs completed a review of the system in 2012 and found that Qrops were:

• being marketed primarily as a way to avoid UK tax;
• being used to facilitate early access to UK tax relieved pension funds;
• being used by some individuals, based overseas or in the UK, in countries bearing no relation to where they live.

This clearly contrasts with the original reasons for allowing transfers of UK pension schemes that have benefited from UK tax relief, to be made free of UK tax to a Qrops.

HMRC needed to be more confident that Qrops were being used as originally intended rather than for tax avoidance; so a number of updates to the regime have been made since then.

What is a Qrops? 

A qualifying recognised overseas pension scheme is a scheme that must not be a UK registered pension scheme and must meet the four following definitions at all times:

1. The scheme must be a pension scheme;
2. The pension scheme must be an overseas pension scheme;
3. The overseas pension scheme must be a recognised overseas pension scheme; and
4. The recognised overseas pension scheme must become a Qrops as defined by the regulations. That is, the scheme will operate the overseas transfer charge and undertake to comply with the information requirements as prescribed by HMRC.

Recognised overseas pension schemes (Rops)

To be a Rops, the scheme must meet a number of conditions, notably:

• The tax recognition test - there are three elements to this test which aims to ensure that the pension scheme is ‘recognised for tax purposes’ under the tax legislation of the country or territory in which it is established.
• The regulatory requirement test - this aims to identify a regulator in the other country that oversees legislation/guidelines that impacts directly on the operation of the pension scheme, to ensure that pension schemes are administered soundly in order to protect members’ interests.
• The pension age test - to ensure retirement benefits are not paid before age 55.
• The benefits tax relief tests - to ensure that any tax treatment of pension benefits is consistent across the scheme for residents and non-residents of the country in which it is established, the scheme must be based in an EU member state or a country with which the UK has a relevant tax information exchange agreement.

Overseas public service pension schemes and schemes set up by an international organisation (e.g. the EU or the United Nations) to provide benefits to, or in respect of, their employees do not have to meet either the ‘Benefits Tax Relief Test’ or the ‘Pension Age Test’ to be a Rops.

Collectively, these conditions aim to ensure the scheme is treated as a pension scheme for regulatory and tax purposes in the country in which it is established and that it is open to residents of the country in which it is based.

The administrator of the scheme must confirm it meets the condition to be a Rops by completing HMRC form APSS251 at outset, and then every five years.

HMRC maintains a list of recognised schemes (Rops list) and will give them a reference number. Inclusion on the list does not mean the scheme is approved by HMRC, nor that it is automatically a qualifying scheme (Qrops).

It is up to the scheme managers of each Rops to ensure their pension scheme continues to meet the requirements to be a qualifying scheme (Qrops).