QROPS – A BRIEF GUIDE
1. What is a QROPS?
QROPS stands for “Qualifying Registered Overseas Pension Scheme. A QROPS is an overseas pension scheme which meets a number of criteria set out in legislation and regulations, the most important of which are that it:
• is regulated as a pension scheme in the country where it is established; and
• is recognised for tax purposes (i.e. benefits paid from the scheme are subject to taxation); and
• cannot pay benefits to a member before the age of 55, except on death.
2. Who should consider a QROPS?
They are generally worthy of consideration in two main scenarios:
• where the value of the member’s pension pot is nearing the Lifetime Allowance (“LTA”), currently set at £1,055,000; or
• where the member is likely to retire abroad.
3. QROPS and the LTA
When a member of a pension scheme takes benefits, dies and at certain other times, a Benefit Crystallisation Event (“BCE”) occurs. If a BCE occurs and the total value of the members funds exceed the LTA at the time, a Lifetime Allowance charge is applied to the excess over the LTA. The charge is 55% for benefits taken as a lump sum or 25% for benefits retained to provide an income.
The transfer of a member’s UK pension fund to a QROPS is a BCE. However, if the LTA is not exceeded at the time of the transfer, there would be no excess over the LTA and therefore no Lifetime Allowance charge.
Once the funds are in the QROPS future growth will no longer be subject to the excess charge even if they exceed the LTA at the time benefits are accessed.
4. QROPS and retiring abroad
QROPS may be highly suitable for individuals who plan to retire abroad, for a number of reasons. Local taxes in some jurisdictions may be significantly lower than in the UK and, in addition, it may be possible to invest your fund and receive your pension in local currency.
In March 2017, the Government announced new rules designed to make QROPS transfers more difficult by charging a 25% tax on transfers. However, there are important exemptions from the charge where :
• the member is resident in the same country in which the QROPS receiving the transfer is established and/or
• the member is resident in a country within the European Economic Area (EEA) and the QROPS is established in a country within the EEA.
In practical terms, this means that transfers outside the EEA are unlikely to occur unless the member is resident in the country to which he makes the QROPS transfer.
5. Which EEA jurisdiction?
The most tax-efficient and flexible jurisdiction for QROPS within the EEA is Malta. This is for a number of reasons:
• As in the UK, and unlike most jurisdictions, flexible drawdown is available with a Malta QROPS. A 25% tax-free cash lump sum is permitted if the member chooses to take flexible drawdown.
• Tax will be due where the member is resident for tax purposes when drawing benefits provided there is a Double Taxation Agreement (“DTA”) with Malta – Malta has such agreements with 60 other jurisdictions, many of which are popular retirement destinations, and including ones where it may be possible to access pension funds with no or low taxes. If there is no DTA with the country of residence, Maltese income tax is paid on QROPS benefits at rates up to 35%.
• A Malta QROPS can invest in a wider range of assets than is available in many UK schemes and the member can have a say in where the funds are invested, and the currency in which they are invested and benefits paid.
Note, however, that the member must be resident in the EEA for five years after the date of transfer, or the 25% exit tax charge will be payable.
6. What happens on death?
The QROPS fund will not be subject to UK IHT as part of the deceased member’s estate. There has been no inheritance tax in Malta since 1993. Local tax laws will need to be considered if the member is resident in another jurisdiction.
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