Technical Insight
Why more clients are choosing to move their overseas pensions back to the UK
With the advantages of the Qualifying Recognised Overseas Pension Scheme (QROPS) fading for UK residents, this article explores why now may be the time to repatriate overseas pensions back into the UK
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The Qualifying Recognised Overseas Pension Scheme (QROPS) was introduced by HMRC as part of the pensions simplification overhaul to simplify global pension transfers, becoming a key consideration for expats and those looking to retire overseas. Prior to 6 April 2006 – known as A-Day – when the new regime came into effect, the transfer process was seen as being overly complicated facing high tax liabilities and penalties, as well as regulatory constraints.
What benefits did QROPS bring?
Not only did the new regime simplify the process, but it brought a number of advantages:
- Consolidation – facilitated bringing a number of pensions together, simplifying ongoing management
- Investment choice – a wider range of assets available, including global funds and diverse asset classes
- Currency risk negated – by holding pensions in the member’s resident country they avoid the risk of adverse currency exchange fluctuations
- Tax savings – pension transfers to QROPS help members to avoid UK income tax on distributions. For UK tax residents, there are many countries that have a double taxation agreement with the UK exempting members from being charged tax twice
- Retirement options – members had a wider choice of how to take their retirement savings when under UK pensions they had to purchase an annuity. Some jurisdictions would allow higher tax-free cash sum limits than under UK law, e.g. 30% in Malta
Successive governments tightened the QROPS rules
Since their introduction in 2006, successive governments have revisited the rules for QROPS due to concerns that they were in certain cases being abused with the product not being used for the purpose intended. Many of the benefits for those moving overseas were also being taken advantage of by members remaining in the UK:
- Avoiding a lifetime allowance (LTA) charge – before its removal in April 2023, UK residents with pension funds above—or expected to exceed—the LTA, could transfer to a QROPS to avoid or reduce LTA charges. Subsequent investment growth within the QROPS fell outside the scope of LTA
- Flexible income – prior to the introduction of pension freedoms in 2015, UK residents could transfer to QROPS to avoid being compelled to purchase an annuity or be restricted by capped drawdown limits
- Higher tax-free cash – UK residents could establish a QROPS in a favourable jurisdiction that allows a higher limit for tax-free cash than the 25% maximum under UK rules
- Removal of the LTA – from April 2024, transfers to QROPS were tested against the new overseas transfer allowance (£1.073M for those without transitional protections), but not the lump sum allowance (LSA) or lump sum and death benefit allowance (LSDBA). There was a temporary loophole that was closed in October 2024, where those still resident in the UK could transfer to the European Economic Area (EEA) or Gibraltar without incurring an overseas transfer charge (OTC) and still draw tax-free cash from the fund without it being tested against the LSA
Thinking about repatriating QROPS?
When we take a look at how things have changed, this question feels ever more relevant. Plenty of UK residents still have pension savings split between UK-regulated schemes and overseas QROPS – maybe from a period spent working abroad, or because transferring overseas once offered some appealing tax advantages at the time. But fast forward twenty years, and many of those perks have since faded away. The Lifetime Allowance has gone, the tax-free cash loopholes have been closed, UK pensions now offer flexible access, and from April 2027 QROPS will be included within the estate for Inheritance Tax (IHT) purposes. Taken together, it’s starting to feel like the balance has shifted – and for many clients, bringing those overseas pensions back to the UK could make a lot more sense.
For those with overseas pensions that are not held in QROPS, they may struggle to transfer the benefits back to the UK as in many cases such a transaction would not be a recognised transfer, and the underlying investments may include assets that are not compatible with UK pensions.
Benefits of bringing QROPS back to the UK
For many UK residents, bringing back overseas pensions to a UK arrangement offers clear advantages:
- Simplification – dealing with UK providers, in sterling currency, under the UK regulatory regime, eases the administration
- Protection – whilst QROPS are not covered by the Financial Services Compensation Scheme (FSCS), most UK registered pensions will be
- Currency exchange risk – taking income and cash withdrawals in sterling eliminates any ongoing foreign exchange risk and costs (although there will be a currency conversion at the time of transfer)
- Tax efficiency – bringing all pensions under one regime removes the need to claim double taxation relief (where it applied) and avoids the need to understand often complex foreign tax rules
- Transparency – members and advisers should be more familiar with UK pension products which generally offer more transparent charging structures compared to QROPS, and can be serviced for lower fees
- IHT estate – with QROPS coming into scope for IHT calculations from April 2027, consolidating pensions together under UK jurisdiction should considerably ease the process for executors
Are there any drawbacks to consider?
Despite most of the advantages of QROPS for UK residents having fallen away, transferring them to the UK won’t be appropriate for everyone – there are some key considerations:
- Guarantees – the existing QROPS may include protected benefits that would be lost on transfer
- Future Residency – where members intend to move abroad to retire, there may be advantages in retaining a QROPS such as potentially more favourable tax rates, and not having to transfer it overseas again, saving further administration and a potential overseas transfer charge. If held in the country where they will live in retirement, they can benefit from taking their benefits in the local currency avoiding exchange rate risk
- Past Residency – members’ previous residences, domicile, double taxation treaties, could affect their tax position
- Transfer costs – some QROPS providers may impose exit penalties or high charges for transferring out, and there could be tax implications
Case Study
In January 2018, Andrew, a UK resident with a SIPP valued at £900,000, was concerned that its value was approaching the LTA threshold (£1M). He transferred it to a QROPS established in Malta – which didn’t provide any protected benefits – where he withdrew 30% as a tax-free cash sum as their rules allowed for a higher percentage than under UK legislation. He continued funding his UK workplace pension and is now looking to fully retire – he will remain living in the UK.
By transferring his UK pension to a QROPS in Malta, Andrew was able to withdraw an additional 5% tax-free cash (equivalent to c.£45,000). Whilst his £900,000 transfer was tested against the LTA in 2018, the future growth had no further impact so there were no LTA charges. Now, with the LTA removed, the tax-free cash loopholes closed, and the inclusion of QROPS in IHT calculations from April 2027; transferring back to the UK brings the advantage of consolidating his pensions, removal of future currency exchange risk, potentially lower costs, and simplified estate planning. Furthermore, the tax-free cash taken from the QROPS doesn’t reduce Andrew’s LSA or LSDBA so when he transfers the crystallised funds back to the UK it doesn’t restrict the amount of tax-free cash that he can take from his UK pensions.
IHT and pensions from 2027
The Finance Act 2026 makes it clear that QROPS will be treated as part of a person’s estate for IHT from April 2027. In practice, this means that moving a QROPS back into a UK pension won’t change the overall IHT position for anyone planning to remain UK resident.
For those who retire abroad, UK IHT can still apply to worldwide assets for a period after leaving the UK, as long as they were UK-resident for at least 10 of the previous 20 tax years. And if someone has always lived in the UK, their QROPS will remain within their estate for up to 10 years after they become non-UK resident, under the post April 2027 rules.
The bill also adds a layer of additional administration. Executors will have to deal not only with UK pension providers but also with overseas QROPS administrators, and where any IHT becomes due in respect of an overseas pension, it can’t be paid using the ‘scheme pays’ process — that’s only available for UK-registered pensions. Instead, the tax would need to come from the beneficiaries or from the residual estate.
Summary
As QROPS celebrate their twentieth birthday, many clients will have used them for a number of different reasons, however for those who remain UK resident, they no longer offer any improvement in terms of tax benefits or greater flexibility, than a traditional UK SIPP. Furthermore, with pensions coming into scope for IHT from April 2027, dealing with a QROPS will make administration of the estate and any IHT bill relating to it, more burdensome with fewer options. Bringing all pensions together under UK legislation can ease the administration both before and after death.
For further information and queries, please call one of our distribution team today, or refer to our TechVoice resources.
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