Overseas transfers

What is a QROPS?

There are various 'hurdles' a scheme must overcome before HMRC will recognise it as a QROPS. To be a QROPS all of the following conditions must apply:

• The scheme must be a pension scheme, providing benefits in the event of retirement or death.
• It must be an overseas pension scheme as defined in HMRC - Pensions Tax Manual - PTM112200.
• A recognised overseas pension scheme (ROPS) as defined in HMRC - Pensions Tax Manual - PTM112300.
• The ROPS must become a QROPS as defined by legislation s169(2) Finance Act 2004.

A QROPS is the top of the tree in HMRC's eyes when it comes to foreign pension schemes. However, even if all the requirements are met, HMRC can refuse to recognise an overseas scheme (for instance if it doesn't provide all the information it said it would).

HMRC maintains a list of ROPS. If a scheme appears on this list, it confirms the scheme meets the conditions to be a ROPS. It does not confirm the scheme is a QROPS which will have to be verified by the transferring firm’s due diligence on the scheme. It is the trustees of a UK scheme's responsibility to check whether the scheme is a QROPS or not. If it is not, the transfer will be an unauthorised payment resulting in tax penalties.

What does overseas mean?

We get a surprising number of questions about this. There is sometimes confusion but the Republic of Ireland, Jersey, Guernsey and the Isle of Man are not part of the United Kingdom. Nor are any other further flung Crown dependencies such as the Falkland Islands.

Are there any issues if they remain in the UK and transfer to a QROPS?

Overseas Transfer Charge

If individuals are not resident in the same country the QROPS is established, they may be subject to an overseas transfer charge occurring. See When does the overseas transfer charge apply? for details of the conditions when this won’t apply.

Payment of benefits from the QROPS

When a pension or lump sum is paid to a UK resident from a QROPS, all of the pension income is chargeable to UK tax, in the same way as it would if it had been paid from a registered pension scheme. Any lump sum payments may be taxed as pension income depending on the tax rules that apply in the country the QROPS is registered.

HMRC – Pensions Tax Manual: PTM102000 Transfers from a registered pension scheme to a QROPS

Payments out of funds transferred to a QROPS on or after 6 April 2017 are subject to UK tax rules for five tax years after the date of transfer, regardless of where the individual is resident.

HMRC - Pensions Tax Manual: PTM112010 Tax on pension payments

The pension age test was also amended so if benefits are paid from a QROPS before normal minimum pension age of 55, they're treated as an authorised payment in the same way an authorised payment is made from a UK registered pension scheme (for example under serious ill-health).

HMRC – Pensions Tax Manual: PTM112300 What is a recognised overseas pension scheme – Pension Age Test

It's not possible for a pension commencement lump sum to be paid first by the QROPS, then by the UK registered pension scheme, if it has been transferred back to the UK.

HMRC – Pensions Tax Manual: PTM103500 Transfers to a registered pension scheme from a QROPS or former QROPS

What are HMRC's requirements in respect of the transfer of a UK registered pension scheme to a QROPS?

When an individual requests a transfer to a QROPS, the administrator of the transferring scheme will ask the individual to provide various details about themselves and details of the scheme they would like to transfer to.

Details of the information required can be found in HMRC – Pensions Tax Manual: PTM102900 - Transfers to a QROPS: member actions - information to be provided before the transfer

An individual’s written acknowledgement

The individual must sign a written statement confirming they're aware a transfer other than a recognised transfer to a QROPS:

• gives rise to a liability under section 208 (unauthorised payments charge), and
• may give rise to a liability under section 209 (unauthorised payments surcharge).

They must also acknowledge in writing they are aware:

• that a recognised transfer to a QROPS may give rise to a liability to the overseas transfer charge, and
• of the circumstances in which liability arises, liability is excluded from the outset, and liability is excluded only if conditions continue to be met over a period of time.

QROPS scheme manager's requirements when benefits are paid or transferred

The QROPS scheme manager must agree to tell HMRC when they pay benefits from the transferred fund or if they transfer the fund again.

Any payment or transfer made in the reporting period which wouldn't have been an authorised payment or recognised transfer from a UK registered pension scheme will suffer the normal tax penalties (see below). These are referred to as member payment charges.

When the member payment charges do not apply

Time limits apply to the member payment charges. These are based on when the member became non-UK resident and when pension savings were transferred out of the UK pension scheme. The date when the QROPS receives the funds also has an impact on the charges. Note, that the charge only applies to funds that came from a UK pension.

5-year non-residence rule

This rule applies to payments made in respect of a member’s:

• UK tax-relieved funds built up before 6 April 2017
• relevant transfer funds
• ring-fenced transfer funds with a key date earlier than 6 April 2017.

For payments from these types of fund the member payment charges do not apply if both:

• at the time the payment is made (or is treated as made) the individual is not UK resident
• they were neither UK resident earlier in the tax year nor UK resident in any of the 5 previous tax years.

10-year non-residence rule

This rule applies to payments made in respect of a individual’s:

• UK tax-relieved funds that were built up after 5 April 2017
• ring-fenced transfer funds with a key date of 6 April 2017 or later.

The member payment charges do not apply to payments from these types of fund if both:

• at the time the payment is made (or is treated as made) the individual is not UK resident
• the individual was neither UK resident earlier in the tax year nor UK resident in any of the 10 previous tax years.

5 years from transfer rule

For payments made in respect of a ring-fenced transfer fund with a key date of 6 April 2017 or later, the member payment charges apply for a period of 5 years beginning with the key date for the particular ring-fenced transfer fund.

This means that even if the individual has been non-resident for longer than 10 full tax years the member payment charges can still apply if it is less than 5 years since the funds were transferred from a registered pension scheme.

Definitions of terms can be found in HMRC Pensions Tax Manual – PTM113230: International: UK tax charges on non UK schemes: the member payment charges

As a transfer to a qualifying recognised overseas pension scheme is a 'permitted transfer', enhanced or fixed protection will not be lost on such a transfer.

The UK scheme administrator must report the transfer to HMRC (they would also have to report a non-recognised transfer).

What is the impact on the individual if it isn’t a recognised transfer?

A non-recognised transfer may result in the following tax penalties:

• An unauthorised member payment charge of 40% of the transfer value.
• If all unauthorised payments in a 12-month period are more than 25% of the fund value, an unauthorised payment surcharge of 15% of the transfer value will be payable by the individual.
• The registered pension scheme will have to pay a scheme sanction charge of 40% of the transfer value. If the scheme administrator has deducted the individual's tax charge from the transfer payment and paid the tax charge to HMRC on the individual's behalf, the scheme administrator may reduce the amount of the scheme sanction charge by the lesser of 25% and the amount of the individual's tax charge deducted as a proportion of the transfer payment, and
• If the amount of non-recognised transfers exceed 40% of the scheme's assets, it could be de-registered with a de-registration charge of 40% of the scheme's assets.

HMRC – Pensions Tax Manual: PTM131000 Taxation of unauthorised payments

Overseas transfer allowance

The overseas transfer allowance is set at the same level as an individual's lump sum and death benefit allowance, before any deductions are made.

For those without lifetime allowance protection on 5 April 2024, their allowance on 6 April 2024 was £1,073,100. If they do, the higher protected amount applies.

If there had been any benefit crystallisation events (BCE) before 6 April 2014, the allowance is reduced by the percentage of the lifetime allowance used before that date.

Every time there is a transfer to a QROPS on or after 6 April 2024, the overseas transfer allowance is reduced by 100% of the value of the transfer.

If the transfer exceeds this amount, then the overseas transfer charge of 25% on the excess is deducted from the transfer.

It should be noted that although a transitional tax-free amount certificate can alter an individual’s lump sum and death benefit allowance, this has no impact on their overseas transfer allowance.

When does the overseas transfer charge apply?

Even if the amount being transferred is within the individual’s remaining overseas transfer allowance, and the transfer to the QROPS is a recognised transfer, there might still be a tax charge on the transfer.

HMRC – Pensions Tax Manual: PTM102200 Essential principles of the overseas transfer charge

For recognised transfer requests on or after 9 March 2017, a 25% tax charge will apply on transfers to QROPS, if:

• the member does not provide the scheme administrator with all the prescribed information before the transfer is made.
• none of the exclusion conditions (see below) are met; or
• from 6 April 2024) one of the exclusions is met, but the transferred value exceeds the individual's overseas transfer allowance

Exclusions

• The individual is resident in the same country in which the QROPS is established.
• The QROPS is set up by an international organisation for the purpose of providing benefits for or in respect of past service as an employee of the organisation and the individual is an employee of that international organisation.
• The QROPS is an overseas public service pension scheme and the individual is an employee of an employer that participates in the scheme.
• The QROPS is an occupational pension scheme and the individual is an employee of a sponsoring employee under the scheme.

There was also an exclusion where if the individual was resident in the UK, Gibraltar or a country with the European Economic Area (EEA) and the QROPS was established in Gibraltar or a country within the EEA. This was removed for transfers made on or after 30 October 2024 by the Budget on the same date. This means individuals now have to be resident in the same country the QROPS is established to transfer without an overseas transfer charge, unless at least one of the other conditions is met.

HMRC – Pensions Tax Manual: PTM101999 Transfers to a QROPS: contents

Within 30 days of the request, the UK scheme administrator must collect information from the individual to allow the transfer to proceed. This can be done using form APSS263. The individual then has 60 days to provide this information. If they don’t, the UK scheme administrator must deduct the overseas transfer charge if the transfer proceeds.

The charge also applies if someone is exempt at the outset, but their circumstances change during the ‘relevant period’ - which is five full tax years from the date of the transfer - so none of the exceptions apply. The reverse is also true – the charge is refunded if it’s applied at the outset, but at least one of the exceptions becomes applicable during the relevant period.

The scheme and individual have joint and several liability for the charge. This means the scheme should deduct and pay the charge to HMRC. But if it doesn’t, the individual will end up paying the charge via self-assessment.

HMRC – Pensions Tax Manual: PTM102200 Essential principles of the overseas transfer charge

When the overseas transfer charge applies due to benefits being over the overseas transfer allowance AND the overseas transfer charge applies, the 25% charge only applies once to the benefits being transferred.

Can an individual transfer from a QROPS, or an unregistered overseas pension scheme, to a UK registered pension scheme?

Almost all pension transfers from overseas pension schemes to UK registered pension schemes are allowable and treated in a similar way to recognised transfers. However, a registered pension scheme isn't obliged to accept the transfer.

Overseas transfers into registered pension schemes aren't recognised transfers. But they aren't unauthorised payments either. This is because unauthorised payments can only come from UK registered pension schemes. The transfer doesn't count as a contribution and therefore doesn't get tax relief and doesn't count against the annual allowance.

Before 6 April 2024, if the transfer was from a QROPS or former QROPS, the individual's lifetime allowance could have be enhanced by the same percentage as the transfer value bears to the standard lifetime allowance at time of transfer.

For example, let's take John who has a transfer of £107,310 from a recognised overseas pension scheme during 2023/24. His personal lifetime allowance will have been 10% higher than the standard lifetime allowance (£107,310/£1,073,100). This recognises the fact that the transferred funds haven't received any tax advantages from HMRC. 

An individual had up to five years from 31 January following the tax year in which the transfer is made, or 5 April 2025 if earlier, to claim this enhancement by registering it with HMRC. In our example, John had until 5 April 2025 to register his claim to an enhancement to his lifetime allowance. It's important to note that this enhancement was only available if the transfer had been from a recognised overseas pension scheme - if it wasn't a recognised scheme, the enhancement couldn't have been claimed.

HMRC – Pensions Tax Manual: PTM175210 - Lump sum allowance and lump sum and death benefit allowance: Enhancement factors: Recognised overseas scheme transfer factor: Overview