This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, they are subject to change and we are not responsible for any errors or omissions.
If you are a British expat in Spain (or elsewhere abroad), you may have heard the word “QROPS” when considering pension planning. QROPS is shorthand for “Qualified Overseas Recognised Pension Scheme” and is commonly used to refer to an overseas pension scheme which could be a suitable destination for a pension transfer.
For instance, if you wanted to transfer a UK pension to a recognised scheme in Spain, this could be called a QROPS. Please note that the terminology was officially updated by HMRC in 2015, to “ROPS” (Recognised Overseas Pension Scheme). The requirements for a scheme to enter the HMRC list also changed in 2017. However, for simplicity in this article, we will simply refer to QROPS going forward.
There are a lot of misunderstandings about QROPS. How does it work exactly and what are the potential benefits and drawbacks? To help our clients in Murcia, Valencia and other parts of Spain, we wanted to offer this quick myth-busting guide for 2023-24 to help keep you informed.
If you want to discuss your financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
+34 966 460 407
info@scottsdale.eu
Myth #1: leaving your pension in the UK makes it subject to income tax
The primary factor determining where your pension income is taxed is your residency status – not the location of your pension scheme. In 2023-24, a UK resident can earn up to £12,570 per year (including pension income) without paying income tax.
After that, a 20% basic rate applies on income up to £50,270. A 40% higher rate applies on income between £50,271 to £125,140. After age 55, up to 25% can be withdrawn from an individual’s pension(s) as a tax-free lump sum.
A Spanish resident, by contrast, has no tax-free lump sum. There is an annual wealth tax (0.2% to 3.5%) which can include pensions, although there is a €700,000 tax-free allowance.
Myth #2: transferring to a QROPS leads to a 25% charge
There is a rule from HMRC which states that a 25% tax charge can be imposed on an overseas pension transfer. However, this depends on a range of factors; in particular, where you live. For British citizens retiring to Spain, there is no 25% charge when transferring to a QROPS because Spain is based within the European Economic Area (EEA).
Myth #3: a QROPS loses half of your pension to tax
In 2021, there was a binding ruling in Spain which imposes a 46%-54% income tax charge on the whole fund value of a pension if it is transferred from a “third country” (e.g. the UK) to an EEA pension scheme.
If you are currently a Spanish tax resident, then as a British expat you should seek financial advice before considering a QROPS. However, if you are not yet classed as a Spanish tax resident then this tax charge does not apply.
Myth #4: Brexit means no more UK pension transfers to Spain
Regardless of your political stance, Brexit certainly shook up the UK’s economic relationship with EU member states, including Spain. The UK is no longer an EEA member as of 31 January 2020, which means no automatic free movement of goods, services and capital between the UK and EEA countries. Fortunately, QROPS is one area of regulation where there has been minimal disruption. UK residents can still move pensions to EEA countries.
Myth #5: a QROPS stops you from moving back to the UK
It is important for British expats to consider the possibility of repatriating to the UK. Perhaps your retirement plans do not work out as you hoped. Or, maybe a family emergency necessitates moving home.
Irrespective of whether you transfer your pension(s) to Spain, it is vital to assess your overall financial goals and situation before retiring overseas. Having a robust contingency plan ready can help to minimise taxes and financial instability later, if you do need to return to the UK.
With those caveats stated, British expats should know that transferring to a QROPS will not prohibit them from returning to the UK. For instance, suppose you move to Spain and transfer your pension (but do not access it). However, you later return to the UK for a few years to work, before returning to Spain to retire. Here, there is little to worry about from a tax perspective as taxes are only due once you start taking pension benefits.
One area to pay attention to, however, is the underlying investments of your QROPs. A financial adviser may suggest QROPS investments to British expats which are not available in the UK. This could create problems if you later return to the UK, since UK-based financial advisers may be reluctant or unable to advise you on them. This may require you to sell these investments before their maturity dates – possibly leading to losses. Be mindful to discuss this possibility with your international financial adviser before committing to a QROPS.
Invitation
If you are interested in discussing your own financial plan or inheritance tax strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
+34 966 460 407
info@scottsdale.eu