Should I transfer my UK pension to a QROPS or a SIPP?
[Estimated reading time: 8 minutes, 27 seconds]
Editor's note: content fully updated 8th June 2017
What’s the difference between QROPS and SIPPs - and should I transfer my pension?
These are common questions I hear.
And if you have a UK pension, you may be asking yourself these questions...
You may have friends or colleagues who’ve transferred their pension into a SIPP or a QROPS- and perhaps you’re wondering whether you should do the same.
Let me explain the differences and the various pros and cons for you to help you decide.
Pensions get quite technical, and the personal circumstances around your pension and retirement needs are unique, so do seek expert help from a qualified professional adviser before taking any action.
What is a self-invested personal pension (SIPP)?
SIPPs are UK-registered personal pension schemes.
They are defined contribution schemes (meaning only the contribution you make is defined - there is no guaranteed level of income at retirement).
They are generally funded by an individual, and abide by UK legislation with regards to tax, and when and how they can be accessed.
SIPPs have become very popular in recent years, driven by their relative low cost - and the wide investment choice they offer savers.
It’s important to remember though, that SIPPs are UK-based, so if you are living abroad the advantages of using them can be limited.
For example, pension contributions in the UK to a UK-registered scheme receive tax relief of at least 20% per year...
However, if you live abroad and are paying into a UK-based scheme, tax relief will only be available for the first five tax years of your non-UK residence…
And you will also be subject to a cap of £3,600 per annum.
Like all UK pensions, SIPPs received a boost a few years back when new rules came into effect providing people with fully flexible access to their defined contribution pensions (including SIPPs).
This flexibility simply means people can decide for themselves when and how they take their pension income, after the age of 55.
What is a Qualifying Recognised Overseas Pension Scheme (QROPS)?
First, a quick piece of myth busting, and a little warning to make sure you don’t fall foul of UK pension rules.
A myth wrongly and often perpetuated by people who promote qualifying recognised overseas pension schemes (QROPS) is that a scheme has received approval from HM Revenue & Customs.
They may refer to it as being an “authorised” or “approved” QROPS.
This is completely untrue.
The reason people choose to refer to them like this is for one of two reasons – ignorance or intentional deception.
If someone who is trying to convince you to transfer uses these words to describe a QROPS, be extremely cautious.
QROPS are also sometimes sold as a way to simply empty a UK pension, “tax free”.
If HMRC believes UK tax-relieved pension assets have been accessed improperly or invested in ways it doesn’t permit, you could face a substantial tax charge.
So, what exactly is a QROPS?
QROPS are actually very similar to SIPPs, as they are defined contribution schemes, but they are based outside the UK.
They can be based in any country around the world, and qualify as a QROPS as long as the scheme meets specific requirements set by HMRC.
As mentioned, HMRC does not vet individual schemes – the scheme trustees notify HMRC of their existence, and self-certify that the scheme meets the criteria.
After this, the scheme will normally become “recognised” by HMRC, and will often (but not necessarily) be included on a list published on its website.
QROPS are intended for people who are planning to, or have already left, the UK.
The main difference between a SIPP and a QROPS is the additional tax benefit a QROPS may bring to those living outside the UK.
QROPS and the lifetime allowance
One of the biggest benefits of QROPS is around something called the lifetime allowance (LTA).
Under current UK legislation, you can only accumulate a tax privileged pension fund of up to £1m, unless you apply for certain types of protection which can boost this to higher levels in some circumstances.
This means pension savings above the LTA may be taxed at up to 55%!
However, if you transfer your pension into a QROPS, it is tested against the LTA at the point of transfer, and not again thereafter.
This means, if the value of your UK pension fund is close to the LTA, it may be worth considering a transfer into a QROPS to avoid being taxed on your pension savings above the LTA in the future.
Should you transfer?
As well as understanding what SIPPs and QROPS are, it is vital that you understand the benefits of the type of scheme you currently have.
There are two types of UK pension scheme – defined contribution and defined benefit.
Defined benefit schemes are colloquially known as “gold-plated pensions.”
They provide scheme members with a pension that is intended to be guaranteed.
These schemes are becoming much rarer due to their cost - and if you have one, you should think very carefully before transferring from it.
It is also now required - by law - that anyone considering a transfer from a defined benefit scheme, including into an overseas scheme such as a QROPS, must have taken financial advice from an adviser qualified to provide UK pension advice.
7 things to keep in mind if you’re contemplating a pension transfer:
#1. Spring Budget 2017: QROPS changes
On the 9th March 2017, some significant overnight changes occurred to pensions legislation, the most dramatic of which relates directly to those who wish to transfer their UK pension benefits to an overseas scheme, such as a QROPS.
In summary, there is now a 25% tax upon transfer, levied at source by the UK trustee, unless one of the following conditions is satisfied:
1. Both the individual making the transfer and the QROPS are in the same jurisdiction treating the EEA as a single jurisdiction for this purpose.
2. The QROPS is a scheme in which the individual’s employer participates, and the employer is a multi- national.
This means that in some circumstances a QROPS is no longer a realistic option.
It can also mean that additional specialist tax advice is required to determine whether a transfer is feasible.
We’ve produced a detailed technical note describing how these changes affect QROPS: you can download it here.
#2. What will my spouse and children get when I die?
With a defined benefit scheme, the death benefits provided to your spouse and children can be relatively poor.
In some cases, especially if your children are older, you may find they receive nothing.
By transferring into a defined contribution scheme – either a SIPP or a QROPS, you may be able to leave much more to your family when you die.
In addition, it may be possible for the fund to “cascade” from one generation to the next.
#3. Is my pension fund near the LTA?
As mentioned above, breaching the lifetime allowance could see your pension subject to high taxes.
It may be worth considering moving your scheme overseas to avoid this happening. A QROPS may be suitable in this case.
#4. How much tax will I pay on my income?
UK pensions are taxed, and in some cases, it may make sense to move your pension to a QROPS in the country you are living in, or to a “third party” QROPS jurisdiction.
This depends on the terms of any double taxation agreement (DTA) between the country where your pension income comes from, and the country in which you are living.
Claiming double taxation relief can be complicated, and if your pension income is paid from the UK, it may result in a procedure to reclaim tax deducted at source.
The purpose of a DTA is to prevent pension (and other) income being taxed twice.
But if there is no DTA in place, you could end up being taxed twice – in the country in which you are living, and where your pension is based. It is therefore of paramount importance that you take specialist tax advice on this point.
#5. How will currency impact my pension income?
Currency is something which must be carefully considered.
You may be able to exchange pension income into another currency, but the timing of an exchange could have a material impact on the size of your pension.
Also remember that if your pension is paid from the UK, and you are living abroad, you will need to factor in an exchange to a local currency when working out your income.
#6. I have a defined benefit scheme and would like to begin drawing my pension early, is this possible?
It’s generally possible to move the retirement date if you have a defined benefit scheme – this is set by the rules of the scheme, but subject to the minimum pension age set by the UK government, now 55…
But, taking your pension earlier than the scheme pension age will normally bring with it quite a substantial reduction in pension.
However, if you transfer the pension into a defined contribution scheme, such as a SIPP or a QROPS, you will be able to begin withdrawing income from age 55.
#7. Will my pension savings perform better if I consolidate into a QROPS or SIPP?
It’s very common for people to have multiple pensions from time spent working at different companies, all with different schemes.
It may make sense for you to consolidate your pensions to reduce costs, and make your pension portfolio work more efficiently.
Knowing whether to transfer your pension is arguably one of the biggest financial decisions of your life, and so it must only be done after taking advice from a fully qualified adviser.
3 ways we can help:
- If you want to learn more, you can download our free guide;
- If you prefer talking to a friendly human, please do get in touch to pick our brains;
- And, if you have a pension and want us to review your personal options, just request our expert advice.