Expat Briefing Editorial Team, 13 August, 2013

For long-term residents of the United Kingdom with plans to retire abroad, QROPS (Qualifying Recognised Overseas Pension Scheme) provide a neat, tax efficient solution to the problem of pension portability for expats. Recent changes in the QROPS rules by HM Revenue and Customs (HMRC) have however caused some uncertainty for expats utilising these schemes in certain jurisdictions.

What Are QROPS?

If a British citizen has become non-resident on a permanent basis, and has no present intention of returning to the UK, they can move their pension fund out of the UK to another country, and it doesn't have to be the country they are living in. For the first five years of non-residence, the fund will remain subject to HMRC's rules, but after that the rules that apply will be those of the destination country of the fund. Such a transferred fund is called a QROPS.

For financial advisors, the most common reason to recommend a QROPS is that income drawn from the scheme is not subject to UK tax. The wider investment choice allowed within a QROPS is the second most common reason that advisors recommend a QROPS, while the lack of compulsion to purchase an annuity if the client holds their pension monies in a QROPS falls third on the list. Advisors also recommend a QROPS due to the fund not being subject to UK inheritance tax on death, although this ranks as only the fourth reason to recommend the product to qualifying clients.

Who Qualifies For A QROPS?

The first qualification is that it is necessary to be already non-resident, and to be able to demonstrate, if asked, that this is a permanent state.

The second qualification is that the individual concerned should not already have retired and taken an annuity. That is usually an irreversible step. You can't normally turn an annuity back into cash.

The third qualification is that there should be an identifiable and moveable pension fund. In theory, pension fund assets of various types can be transferred, e.g. investment holdings in addition to cash and cash equivalents, but the process will be easier, the nearer the assets are to being cash.

There are limits however to the list of countries which are suitable destinations for QROPS. HMRC has to approve destination pension fund administrators, and once it has done so, that administrator is 'Recognized'. There is quite a large number of countries which have approved pension fund administrators, and HMRC publishes a list of them every two weeks.

The list of approved (recognized) QROPS operators is however a moving target, because HMRC tries to police the behaviour of administrators on the list, and has removed some countries where administrators went outside its rules, for instance by allowing full cash withdrawal before the expiry of five years of non-residence (see below).

Countries on the list that are commonly used for QROPS include Gibraltar, the Isle of Man, New Zealand, Australia and Ireland - there are almost 50 of them altogether. 

HMRC Moves the QROPS Goalposts

The UK has extended its crackdown on overseas tax avoidance with the closure of what the Treasury has labelled an unintended loophole for UK residents transferring pension savings overseas.

New legislation, effective April 6, 2011, and included in Finance (No.3) Bill that year, was designed to prevent individuals from taking advantage of a tax loophole that would have emerged on April 6, had the government not taken action on the matter.

HMRC said that the government's intention was to prevent tax avoidance through the interaction of relief for pension savings and the provisions of certain double tax arrangements.

According to HMRC, the legislation provided that, notwithstanding the terms of a double taxation arrangement with another territory, a payment of a pension or other similar remuneration may be taxed in the United Kingdom where:

In the event that tax is paid in the other jurisdiction, appropriate credit will be available against the UK tax chargeable.

On December 6, 2011 draft secondary legislation to make changes to the system for transfers of pension savings to QROPS was published for an eight week consultation.

In summary, the changes were designed to firm up the tests for an overseas pension scheme to make the rules work as always originally intended.  These included more stringent checks, such as changes to the period in which a QROPS has to report information on payments to HMRC.

One of the key elements of the draft legislation was the ‘tax recognition’ requirement, under which the pension scheme needs to be ‘recognised for tax purposes’ under the tax legislation of the country or territory in which it is established.   

According to guidance issued by HMRC which has effect from April 6, 2012, the tax recognition requirement is met if the following three conditions are satisfied:


These changes took many QROPS providers by surprise, and resulted in a large swathe of them being omitted from the approved list.

Guernsey was one of the largest victims of the new rules, and its government went as far as to accuse HMRC of singling the jurisdiction out.

Guernsey has been one of the primary locations through which QROPS funds can be routed, and data from HMRC shows that in the first half of 2011, there were more pension transfers into QROPS in Guernsey than any other jurisdiction globally.

Traditionally, Guernsey is primarily a ‘third country’ QROPS destination, meaning that most of the QROPS transferred to the island are for individuals who have left the UK to live elsewhere, such as in Europe or Asia. 

Guernsey was, however, hit with something of a bombshell following the tightening of the QROPS anti-avoidance rules, and when HMRC published an updated QROPS list on April 12, 2012, it contained just three Guernsey-approved schemes, compared with more than 300 on April 5.

It was previously considered that in order to meet the new rules, any scheme wishing to be granted QROPS status after April 6, 2012, would have to offer equal treatment to both resident and non-resident taxpayers. However, it became apparent only days before the publication of the new list on April 12 that HMRC's intentions were otherwise, and that the UK instead sought to significantly restrict the provision of UK tax exemptions on pension transfers.

HMRC indicated that only schemes offered to 'residents only' would be considered qualifying schemes under the new criteria, meaning that QROPS would have to be offered from the same territory in which the UK taxpayer is newly-resident.

The Guernsey government announced in July 2012 that was revising its Section 157E pension scheme structure in an effort to have it recognized by the UK tax authority as a QROPS that can accept both resident and non-resident taxpayers.

The new anti-avoidance rules affected QROPS in the Isle of Man and Jersey in similar ways. In April, the Manx Government confirmed that the changes to the QROPS rules would mean exclusion from the recognised list of its “50C” pension structures. Other Isle of Man schemes, established under the Income Tax (Retirement Benefits Schemes) Act 1978, and Part I of the Income Tax Act 1989, have however been approved.

Following the introduction of the new UK tax rules, the Jersey Government announced the launch of a new Jersey-based pension scheme, the Recognized Pension Scheme (RPS), which provides a structure compliant with UK law following changes to the QROPS rules.

HMRC has, however, caused further uncertainty with its ill-communicated exclusion of QROPS schemes based in certain jurisdictions from time to time.

According to the tax authority, the approved list is based on information provided to HMRC by non-UK schemes when they give notification that they meet the conditions required to be a QROPS. HMRC does not verify the information, and inclusion on the list does not mean that a scheme has been approved. Also, a scheme may give notification but choose not to be listed. However, a scheme may also be removed from the list temporarily while HMRC undertakes a review.

In August 2012, HMRC removed all QROPS based in Cyprus from its list of approved schemes for reasons that remain largely unknown. There is one school of thought that believes Cyprus-based schemes were struck from the list because they failed to meet the new tax relief test. However, others are of the view that HMRC took the decision to delist Cypriot QROPS schemes because the country does not have a pensions industry regulator. Whatever the reason, HMRC has remained tight-lipped about its decision. What is certain is that no Cypriot QROPS featured on HMRC’s latest approved list at the time of writing, which was published on August 1, 2013.

A similar situation occurred recently in relation to QROPS based in Hong Kong, with all but two of 25 Hong Kong QROPS that were previously listed in mid-July removed from the August 1 list.

Nigel Green, CEO of the financial advisory firm deVere, was quoted as saying that the move signals a "more proactive" approach to deciding which jurisdictions should be included on the list. He added: "Inevitably, there will be a smaller list of potential jurisdictions into which UK pensions can be transferred, but the list, and therefore the pension transfer industry itself, will become even more robust."

However, a key development occurred in June 2013 when HMRC backed down from a legal case against investors in an overseas pension scheme, abandoning an attempt to charge a 55 percent tax and agreeing to pay all legal costs incurred on an indemnity basis. The presiding judge at the Royal Courts of Justice has instructed the tax authority to make a public statement on its treatment of QROPS within 21 days; this was given to the court, but its contents have not been made public at the time of writing.

The case concerned a Singapore-based scheme called ROSIIP, which was delisted by HMRC following a previous court case in 2012. However, in the latest legal action, the court was told that HMRC had failed to act after it learned why the ROSIIP scheme should not qualify as a QROPS, and that it had failed to disclose that, in comparable cases, it had waived the 55 percent charge.

The decision to withdraw was praised by Green, who observed: "HMRC has made the correct and fair decision to abandon this case. It would have been inappropriate to pursue it after individuals were led to believe that this particular QROPS was authorised by the tax authority, subsequently invested in it, only later to discover it had been delisted and taxes of 55 per cent had been applied."

HMRC’s latest approved QROPS list can be viewed here.

What Are The Best QROPS Jurisdictions?

It is not the intention of this article to provide financial advice. However, experts in this area suggest that, following the 2012 tax changes, the most secure QROPS schemes would appear to be with an EU provider, and the De Vere Group specifically identifies Malta and Gibraltar: the former is an integral member of the EU, with a highly-regulated banking sector and a sophisticated and transparent tax system; the latter is a member of the EU for financial services due to its UK link.

There were 16 Malta-based QROPS schemes on HMRC’s latest list. However, Gibraltar in particular has come on leaps and bounds as a QROPS location, and a recent poll undertaken by Skandia International placed the territory second with 26 percent of the vote as the preferred QROPS jurisdiction in a survey of 141 international advisers who use these schemes.

Albert Isola, Gibraltar’s Minister with Responsibility for Financial Services commented: “This independent poll is very good news for Gibraltar and represents a clear recognition of the significant work undertaken in the field of imported pensions by a team of industry and government representatives led by my predecessor Gilbert Licudi QC. I view this area of business as one where Gibraltar can prosper significantly and aspire to market leadership.”

Since specific legislation was introduced last year, the Gibraltar’s finance centre has been highlighting the opportunities in this area and as the Skandia Poll confirms, “in the space of less than a year, Gibraltar has come from nowhere to become a very strong QROPS centre.”

Gibraltar’s new mandatory QROPS provider Code of Conduct means that practitioners accepting QROPS business undertake comprehensive due diligence measures to safeguard Gibraltar's reputation as a pensions domicile.

The Code warns Gibraltar professionals to be wary of suspect QROPS transfers, and in particular those that exceed the limits on cash distribution set by the Gibraltar government and the UK tax authority. In particular, the Code commits Gibraltar providers to maintain best practice and standards to help guarantee continued adherence to UK Inland Revenue QROPS rules and also sets out policies on “fair” fees and foreshadows the introduction of an industry Ombudsman.

In an effort to demonstrate the territory's compliance with the spirit of HMRC's recent rule change with regards QROPS, the Gibraltar government earlier amended its pensions law to introduce limits on imported pension provisions in line with UK policy. Lump sum cash distributions to persons over 55 years old have been limited to 30%, a 2.5% tax is levied on distributions, and new restrictions are in place to prevent transfers with jurisdictions that do not enforce sufficient safeguards.

Referring to the risks of money laundering or other potential pension busting arrangements, the Code states: “In any circumstance where the member is unable to identify both the ultimate originator and source of funds, and all subsequent investment steps of the assets under management, that business should be rejected".

“Members need to be acutely aware that a small number of operators in other jurisdictions have more pressure to continue to operate schemes that are non-compliant, and may seek to use conduits operated in other jurisdictions, including Gibraltar," the Code adds.


The QROPS transfer process does have quite a few potential dangers of its own. You need a good IFA, naturally, but once the fund has left the UK, you need a comparable adviser in the remote destination, unless you are merely using the remote trust administrator as a 'post office'. Even then, you should satisfy yourself that they are trustworthy. And you should make very certain that during the transfer process itself, your fund does not pass outside the control of the trusted parties you have included in the process.

It should also be said that HMRC has considerable reservations about some of the QROPS channels, particularly when they involve full cash alternatives, and may move against individual fund-holders who use what it considers to be unacceptable schemes. This danger exists during the first five years of non-residence, but after five years there is nothing that HMRC can do, unless of course you return to the UK.

All of that said, the costs and difficulties of the QROPS process are well worth accepting if the result is to prise your savings out of their restrictive UK strait-jacket.

Tags: business | Compliance | individuals | pensions | investment | Cyprus | Hong Kong | Gibraltar | Malta | Isle of Man | Australia | Guernsey | Jersey | United Kingdom | legislation | court | law | offshore | tax authority | tax | tax avoidance |


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