Since 2006 people moving abroad permanently from the UK, either to work or retire, have been able to transfer their UK registered pension overseas with them to a suitable qualifying overseas recognised pension scheme (QROPS). Once you have been a non-UK resident for 5 consecutive tax years, depending on your circumstances, there could be advantages transferring to a QROPS for retirement planning purposes. This article will examine those potential advantages and the rules surrounding overseas transfers you need to be aware of.

The lifetime allowance is a limit on the amount of money you can withdraw from your pension before triggering an extra tax charge from HMRC. The lifetime allowance at the time of writing is £1,073,100 and will be frozen until April 2026. When a UK pension is transferred to a QROPS, a lifetime allowance test is applied on the pension by the transferring UK pension scheme. If you have a large pension fund you could transfer to a QROPS and have the lifetime allowance test before it exceeds the limit. The pension fund can then grow beyond the limit without having any further tests applied.

The lifetime allowance test also applies to any uncrystallised funds paid out as a lump sum death benefit, beneficiary’s drawdown or annuity. Any excess will be subject to the lifetime allowance charge in the normal way. A transfer to a QROPS prior to the fund exceeding the limit will avoid the test being applied when the death benefits are paid.

The tax treatment of death benefits paid from a Gibraltar QROPS can be more favourable than those paid from a UK money purchase scheme. Under UK rules, if a member dies over the age of 75, a death benefit lump sum payment to a beneficiary will be subject to the beneficiary’s marginal rate of tax. A lump sum death benefit can be paid tax free from a Gibraltar QROPS to a beneficiary, even though the deceased member was over 75.

Gibraltar QROPS incorporate discretionary powers over the payment of any lump sum death benefit, where members provide guidance via non-binding nominations. When discretion does apply, the death benefits normally fall outside the members’ IHT estates. However, there can be IHT consequences if a member transfers between pension schemes or increases contributions while in severe ill health and dies within two years. HMRC’s summary of HMRC v Parry 2020 (the Staveley case) indicates HMRC has not changed its stance on the IHT treatment of pension transfers motivated by death benefit improvements.

Contributions to a Gibraltar QNUPS (Qualifying Non-UK Pension Scheme) can also be made for the purposes of pension provision. Provided the member is not in serious ill health at the time the contributions are made, funds accumulated within the QNUPS will be outside the member’s IHT estate. QNUPS in Gibraltar also offer greater investment flexibility compared to UK pension schemes.

Once you have been a non-UK resident for 5 consecutive tax years and reached the age of 55, a Gibraltar QROPS can pay 30% of the pension fund as a pension commencement lump sum (tax free). Normally, only 25% can be paid as a PCLS payment in the UK.

The rest of the fund must be retained to provide an income for life. A key advantage of taking an income from a Gibraltar QROPS is that the income payments only attract a 2.5% tax rate.

Safeguarded benefits include defined benefits, guaranteed minimum pensions and guaranteed annuity rates. If a member has safeguarded benefits worth more than £30,000, they must receive regulated advice from a UK financial adviser before transferring those funds. This requirement includes overseas transfers, where the member is also likely to need advice from an overseas based adviser in respect of the other country’s pension and tax regime.

In order to be a QROPS, an overseas pension scheme must first be a recognised overseas pension scheme (ROPS). An overseas transfer is only an authorised payment if the receiving overseas scheme is a QROPS as at the date of the transfer. A transfer to an overseas pension which clearly is, or later turns out to be, a non-QROPS as at the date of the transfer is an unauthorised payment, subject to a 40% unauthorised payment charge and possibly also a 15% unauthorised payment surcharge and a scheme sanction charge. HMRC publishes a ROPS list, warning that the member is responsible for establishing whether an overseas pension scheme is a QROPS before transferring.

To become a QROPS, all the following must apply:

1. The scheme must self-certify to HMRC that it is a recognised overseas pension scheme.
2. HMRC must not have excluded it from being a QROPS.
3. It must undertake to report certain details on UK tax relieved pension funds and inform HMRC if it ceases to be a QROPS.

UK tax charges can still apply for a period after transferring to a QROPS. Unauthorised member payment tax charges can apply if certain investment and benefit restrictions are breached. A 25% overseas transfer charge will also apply on transfers to QROPS that do not meet one of the exemptions specified by HMRC. A member must be tax resident in the same country as the one in which the QROPS is established or is tax resident in Gibraltar, or the EEA, and the QROPS is established in the EEA or Gibraltar.

The transferring UK pension scheme must carry out the LTA check and calculate any LTA charge before calculating any overseas transfer charge. If both charges apply, the scheme calculates the overseas transfer charge on the value of the fund available for transfer after deducting the LTA charge.

Gibraltar QROPS are mostly open architecture which means the member can choose their own investments. A wide range of investments can be selected from exchange traded funds, collective investment funds, securities to physical gold.

Financial services in Gibraltar are regulated and licensed by the Gibraltar Financial Services Commission. Pension scheme operators in Gibraltar must obtain a pension scheme controller license in order to offer QROPS. Under the conditions of the license, Gibraltar QROPS providers must take steps to protect their members. For example, they must ensure the member has received appropriate advice from a regulated financial adviser. They must also treat members as retail investors and take sufficient steps to protect them from high-risk non-retail investments.