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For British expats retiring to Spain (or another country), one of the key questions to answer is what to do with your pension. Should you keep it in the UK, drawing an income from it whilst abroad? Or, should you “take it with you” – i.e. transfer it overseas?
The latter option can be done using a Qualified Recognised Overseas Pension Scheme (QROPS). Below, our Valencia financial planners at Scottsdale explain how QROPS works for British expats in Spain and how it can feature in a wider retirement plan.
We hope this content is helpful. 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
QROPS became ROPS in 2015. Most people still refer to them as QROPS. The “Q” (for “qualifying”) was removed by HMRC to avoid some potential confusion with clients. For readability and familiarity, in this article we will refer to ROPS as QROPS.
What is a QROPS?
When a UK citizen (and resident) contributes to a UK pension scheme he/she is entitled to a range of attractive tax benefits. For instance, in 2023-24 an individual can contribute up to 100% of their yearly earnings to their pensions (or £60,000 – whichever is lower) and receive “tax relief” on their contributions.
For a basic rate taxpayer, this “boosts” their contributions by 20%, effectively costing only 80p to put £1 into a pension. For someone on the higher rate, the cost is 60p (i.e. a 40% “boost”). When you start receiving your pension income, moreover, you can earn up to £12,570 without income tax under your Personal Allowance.
If you move abroad, however, then many of the tax benefits of UK pensions can be lost. By transferring a UK pension to a QROPS, a British citizen can sometimes solidify their financial position and retain some benefits of the UK tax system – whilst possibly opening doors to improve their financial position in retirement.
In short, a QROPS refers to an overseas pension scheme recognised by HMRC as meeting certain criteria – allowing it to enjoy specific British pension benefits.
Why use a QROPS?
For British expats retiring in Spain, a QROPS can be a helpful retirement planning option in particular situations. For instance, it can allow an individual to hold their pension in different currencies – helping to mitigate conversion costs and exchange rate risks.
A QROPS can sometimes open up more investment choices for the pension owner which may not have been available in the previous UK scheme. It can also offer more flexibility for estate planning, allowing for more options when passing down wealth to beneficiaries.
However, there can be downsides to a QROPS. There may be a risk of de-selection by HMRC if the UK government feels that the scheme no longer meets its standards. Also, certain pension holders might forsake attractive benefits from their UK scheme if they transfer it to a QROPS.
For example, someone with a final salary pension (which offers a guaranteed retirement income from a former employer) may do best by holding onto it.
Is a QROPS a good idea?
A pension transfer to a QROPS is not always the right decision for everyone. For instance, if you think there is a strong chance that you will eventually return to the UK after retiring, then you may wish to continue basing your pension(s) there.
For British expats in the EU, you also need to consider the possibility of EU pension regulation changing in an unfavourable direction. This might introduce – or exacerbate – issues surrounding fees, taxes, disclosure and areas of compliance.
Just because an overseas scheme is listed as a QROPS on the HMRC register does not mean it is necessarily a “good” one. In light of these issues, it is always best to seek financial advice from a professional (with expat experience) to fully understand your pension options.
With this all said, there can still be powerful incentives for British expats in Spain to consider QROPS. For instance, those aged over 75 are potentially able to pass on their pension fund on death without tax unlike a UK pension.
Those people with pension pots at or over the lifetime allowance can continue to grow their funds without the additional charges imposed on UK pension funds. This is especially important for this tax year as the lifetime allowance charge has been reduced to 0%.
Since 2017, the UK government has required that a UK pension can only be transferred to the same jurisdiction as the British expat intends to live (to avoid a 25% transfer charge). However, an expat could still live in Spain and transfer his/her UK pension to a QROPS in Malta because HMRC considers the European Economic Area (the EEA, of which both Spain and Malta are a part) as one jurisdiction.
You cannot transfer your State Pension to a QROPS.
Conclusion & invitation
A QROPS can be a great retirement planning option for British expats moving to retire in Spain. However, it is important to carefully consider the risks and to make the best decision for your goals and circumstances. Seeking professional advice can be valuable in providing the information you need to make the best decisions.
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