Since 2006 people moving abroad permanently from the UK, either to work or retire, have been able to transfer their UK pension overseas to a qualifying recognised overseas pension scheme (QROPS). There may be advantages to transferring to a QROPS for retirement planning purposes. This web page sets out the rules surrounding overseas transfers that you need to be aware of.

The lifetime allowance was a limit on the amount of money you can withdraw from your pension before triggering an extra tax charge from HMRC. The abolition of the Lifetime Allowance (LTA) from April 6, 2024, has removed the cap on total pension savings and introduced new, more complex limits on tax-free lump sums. The key Impacts are:

• Unlimited Pension Savings: Individuals can now accumulate unlimited pension savings without facing the previous LTA tax charges (up to 55%). This particularly benefits high earners and those with long careers who want to save more for retirement.
• New Allowances: The LTA has been replaced by three new allowances that limit the tax-free benefits an individual can receive:
  • Lump Sum Allowance (LSA): Capped for most people at £268,275, this limit applies to the total tax-free cash (usually 25% of the pension pot) a person can take during their lifetime. Any lump sum above this will be taxed as income.
  • Lump Sum Death Benefit Allowance (LSDBA): Set at £1,073,100 for most people, this is the maximum amount of tax-free lump sums that can be paid during an individual’s lifetime and on death before age 75.
  • Overseas Transfer Allowance (OTA): Limits the amount that can be transferred to a Qualifying Recognised Overseas Pension Scheme (QROPS) tax-free to £1,073,100.

For UK pension schemes, if a member dies before age 75 and the scheme pays a lump-sum death benefit, the lump sum is not usually taxable.

However, if a member of a UK pension scheme dies over the age of 75, a lump sum payment to a beneficiary will normally be subject to tax at the beneficiary’s marginal rate of tax.

All lump sum death benefits from a Gibraltar QROPS are paid free of Gibraltar tax, even if the deceased member was over 75. However, in some circumstances lump sums payable to UK-resident beneficiaries are treated as income and may be liable to tax at their marginal rate.

Currently, death benefits from UK schemes are usually exempt from inheritance tax. From 2027 this will change and lump sum death benefits payable from a UK scheme will be included in the deceased’s estate for IHT purposes.

Individuals who have been non-UK resident for more than 10 of the last 20 tax years may be able to mitigate any liability to UK inheritance tax by transferring their pension overseas.

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. (You may be liable to additional tax in your country of residence, you should seek tax advice if unsure of the position)

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 advice from a UK regulated 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.

A 25% Overseas Transfer Charge (“OTC”) will apply on transfers to QROPS that do not meet one of the exemptions specified by HMRC. Generally, a member must be tax resident in the same country as the one in which the QROPS is established to avoid the OTC.

A transfer to a QROPS must be tested against the member’s available overseas transfer allowance. If the value transferred is more than the member’s available allowance, the excess will be subject to the overseas transfer charge at a rate of 25%.

Unauthorised member payment tax charges can apply if certain investment and benefit restrictions are breached.

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.  Unless otherwise approved as a professional investor, they must treat members as retail investors and take sufficient steps to protect them from high-risk non-retail investments.