QROPS (Qualifying Recognised Overseas Pensions Schemes)
Until April 2006 it was very difficult to legitimately move UK pension rights offshore. With the introduction of Qualifying Recognised Overseas Pensions Schemes (QROPS) that has now changed. QROPS are non UK pensions meeting the rules of the jurisdiction in which they are located and authorised in that jurisdiction as pensions.
Transferring UK pensions to QROPS
HM Revenue and Customs (HMRC) backed by primary UK legislation have put in place a pre-approved system whereby UK pension rights can be transferred to a QROPS at the member's request.
To obtain QROPS status a QROPS provider must meet a number of HMRC reporting requirements for five complete tax years after the member (please note member not benefits) has left the UK. In order to transfer UK pension rights to a QROPS the member must have left or intend to leave the UK for tax purposes. Provided a member meets this simple test UK pension rights can automatically be transferred offshore in the same way as pensions can be transferred between approved providers within the UK. Correspondingly when benefits are transferred to a QROPS this is done without any UK tax charge. UK
pension rights may be transferred offshore either before the member commences taking benefits or once they have come into payment. This includes most types of pensions including income drawdown persons currently in payment and protected rights, which are pensions resulting for UK national insurance rebates. It is not however permissible to transfer an entitlement to the basic UK state pension to a QROPS. There is no link between where the member lives and the geographical domicile of a QROPS, so the member may choose any offshore tax friendly jurisdiction.
Significantly for those who choose to leave the UK they may transfer their UK pension rights to an offshore QROPS and in doing so remove the income stream from UK taxation. This is important because once a UK resident pension comes into payment the UK tax authorities will automatically tax the pension until the member establishes a new tax residency or the benefits are moved offshore.
Once a person has been outside of the UK for five or more complete tax years the reporting requirements to HMRC cease and the benefits become subject to the laws and associated pension rules of the jurisdiction where the QROPS is located. Plans in some jurisdictions have no restrictions on allowable investments or how much income can be drawn in any given year and no annuity purchase is required. By moving UK pension benefits to a QROPS assets are effectively removed from the UK tax net and introduced to a new tax environment dependent on the owner's residence. For many expatriates the avoidance of UK pension taxes and the dangers of additional pension tax levies are an important planning consideration.
Spanish Taxation on UK Pensions
In Spain UK pension income after allowances is generally taxed at rates between 24% and 43% dependent on income levels. Although experience shows that sometimes a more favourable tax treatment can be applied. With the slowing housing market in Spain it is likely that the tax authorities will become less generous and correspondingly more active planning is required if Spanish taxation is to be minimised. The longer term flexibility now offered by QROPS means that with correct planning the income stream can be structured to significantly reduce overall income taxation.