ROPS - Recognised Overseas Pensions Schemes - Fully explained and advice

A Recognised Overseas Pension Scheme (ROPS) - until recently known as QROPS - is an overseas pension scheme that meets certain requirements set by HM Revenue and Customs (HMRC).

A ROPS can receive the transfer of UK Pension Benefits in the vast majority of privately administered personal or corporate pension schemes, without incurring an unauthorised payment and scheme sanction charge.

To qualify as a ROPS the pension scheme must behave as if it were a UK pension for investors who have been UK resident in the previous five tax years.

If you return to the UK, the ROPS will become subject to UK pension regulations.

However, for investors who have been non-resident in the UK for at least five tax years, the ROPS becomes subject to the laws of the overseas jurisdiction in which it is based. Consequently, you can take income with no limits and there will be no deduction of tax at source (although taxation will apply in accordance with your current country of residence).

Is a ROPS right for you?

When it’s broken down, people have two choices when it comes to managing existing UK pension schemes:

• Option 1: Leave the UK and retain your workplace or private pension with a UK provider
• Option 2: Transfer the UK pension funds into a ROPS

There are other alternatives and variants of course, but generally the options come back to these two.

ROPS can provide an opportunity for people to unlock significant benefits from their pension, including enabling them to avoid tax in the UK by transferring their pension to a ROPS.

Defined benefit pension schemes and ROPS

If you have a defined benefit pension scheme, you may also wish to read our detailed overview of defined benefit schemes, which also looks at potential reasons why a ROPS transfer may or may not be a suitable option for you.

Who is eligible for a ROPS?

Typical scenarios are where a UK resident leaves the UK to emigrate (or to retire abroad) having built up a pension fund within a privately administered scheme or when a person born abroad who has spent some time working in the UK and built up benefits in a UK Pension Scheme decides to return to their home country with an expectation of then retiring there.

The ROPS does not have to be established in the new country of residence, thus providing greater flexibility and stability, along with a wider choice of scheme provider. To become a ROPS, a pension scheme must apply to and be approved by HMRC. A list of ROPS that have consented to have their names published is available on the HMRC website and is regularly updated.

Overseas transfer charges

The overseas transfer charge has been introduced to deter people transferring pensions out of the UK for purely UK tax avoidance reasons and is designed to ensure that if a ROPS goes ahead, any potential lost tax revenue is recouped by the government when the transfer is made.

It is important to note that not all ROPS pension transfers will be subject to the new overseas transfer charge but you will be required to pay 25% of the value of the transfer in advance if the following criteria apply to you:

• You are not a tax resident in the EEA and the pension transfer is to a ROPS in a country other than your country of residence (i.e. if you are a tax resident in the UAE and your ROPS is in Malta).
• You are a tax resident in the EEA and the pension transfer is to a ROPS outside of the EEA (e.g. you live in France and your ROPS is in Australia)
• You (the member) has not provided all the required information before the transfer is complete
• When the transfer was requested you were either transferring your pension to a ROPS in your country of residence, or you were a tax resident in the EEA and transferring to a ROPS also in the EEA, however, within five years of the transfer your circumstances change such that you no longer meet the above criteria. For example, if you move outside the EEA or transfer your ROPS funds away from your country of residence.

Transfers not affected by the overseas transfer charges

If the following criteria apply to you, you will not be subject to the overseas transfer charge:

• Your pension transfer is to a ROPS in the EEA and you are a tax resident within the EEA (i.e. any country within the EU and also Liechtenstein, Norway and Iceland and Gibraltar)
• Your pension transfer is to a pension scheme in your country of residence (eg. if you are a tax resident in Australia and you transfer your pension to an Australian ROPS)
• Transfers which are subject to unauthorised payments because they are not recognised transfers
• You are a former employee of an international organisation that has set up a ROPS specifically to provide benefits for former employees
• You are transferring to a ROPS which is an overseas public service pension scheme you are employed by an organisation participating in that pension scheme.
• You are an employee of an organisation sponsoring an occupational pension which qualifies as a ROPS

How the overseas transfer charge will be paid

Both you (the scheme member) and the manager of the pension scheme are liable to pay the overseas transfer charge. It is a requirement of the scheme’s manager to deduct the necessary transfer charge from the pension funds before the transfer is complete.

The charge must be reported and paid to the HMRC by the scheme manager and any additional payments, should they be required, be covered in your Self Assessment.

ROPS fees and charges explained

In the UK, financial advice is strictly regulated and advice can now only be provided under a fixed fee charging structure (normally as a % of the funds under management). Offshore financial advice can in theory still be offered on a commission basis and therefore can be incredibly lucrative for the adviser.

It is important to understand that that even if the funds perform as expected (in some cases, up to 11% returns) the fees, charges and commissions for a ROPS will eat into your pension from the first day potentially significantly reducing or eliminating any gains made.

QROPS fees, charges and commission structures

Any investment will incur an annual charge and in the case of a ROPS, this will be taken from your pension. However, remember that in a lot of cases the fees will actually be based upon the initial value of your pension, rather than recalculated year on year.

You may also be liable for higher annual charges on the investment platform if your adviser takes commission payments.

Ultimately, when it comes to ROPS charges, transparency is key. When reviewing your report, look for the four tiers, namely:

1. ROPS charges themselves
2. Life bond charges including annual fee, admin fee, dealing costs
3. Cost of the underlying ETF’s, Mutual Funds, etc
4. Ongoing advisor charges
5. Always ask for confirmation as to whether the adviser receives commissions from any recommendations as these will come from your pension fund.

Typical concerns around ROPS fees and charges

There are a number of people who are concerned about their investment, or the way their ROPS was "sold" to them. Some of the more common issues include:

• My pension has been decimated by fees, charges and commissions
• I don't think I'm being told the whole story
• The charges are much higher than expected
• The pension doesn’t appear to be performing as expected
• I’ve stopped receiving an income from my pension
• My adviser has disappeared

If you are concerned that one of more of these apply to you, seek an independent review of your investments and it may be possible to:

• Change the ROPS or move it back to a SIPP (or other financial product)
• Change the underlying funds

The ROPS transfer process

The transfer process begins with the person with the UK pensions writing a letter of authority allowing the adviser to review any pension schemes held in their name. At this stage many advisers/firms will also request QROPS transfer paperwork at the same time.

The adviser will review the pension and often provide a report. The detail within this report will vary depending on the company you are dealing with.  Receiving personalised report should also include things like your risk profile as well as your objectives and therefore should detail everything they have found, the options available (including reasons why and past performance), detail all charges which apply.

Once the report has been presented, the adviser will walk you through the options and charges, as well as growth potential to ensure that you full understand all the options available. They’ll then make their recommendation to you about your best course of action, which you should never be pressured into taking.

If you decide to proceed with the transfer, you should have a choice about how you would like to pay for their service. Fee based, which is a charge you pay separately or is taken from the money transferred which tends to be a percentage of the pension pot or in many cases people pay by commissions which again is a percentage of the pension but tends to be a higher percentage and, in turn, will increase annual charges.

As with any pension or investment, a ROPS then incurs annual charges, which again are simply taken from the pension itself but on many occasions are often excluded from the reports as the advice is considered to be given to the Trustees and not yourself and therefore they already know the annual QROPS charge.

Remember to always ask about the costs and be absolutely clear how your pension will be paid for before you sign any contracts.

How a ROPS is traditionally structured

A ROPS is made up of three layers.

The ROPS itself is a pension wrapper like the occupational pension, personal pension, final salary pension or Self Investment Pension Plan (SIPP) you are looking to move it from.

The advisers then include within this for an offshore investment platform usually made up of offshore life bonds, and within this the investments you wish to make, such as ETF's, Mutual Funds, Stocks & Shares and more.

ROPS Platforms

Your adviser will then select the most suitable offshore investment platform to invest your pension.

A true independent adviser will not be restricted on which provider to use and with small the differences between them should recommend the most suitable.

The adviser’s investment recommendations should be matched against your risk profile to ensure that your investment has the best chance of achieving your objectives. If you have not completed a risk profile or had a detailed discussion of the level of risk you wish to take then ask how they formulated your plan.

Once again, as with any investment platform there are charges which apply to each investment scheme and will range from 0.2% to 1.6% per year, could be based on the initial investment amount or the current value and could be for a set period of time or the life of the investment platform.

The charges will differ from provider to provider and how you are paying for the services.

The underlying investments

The final element to the ROPS transfer is the actual funds where the money is invested.

There are typically four types of options available: ETF (Exchange Traded Funds), Mutual Funds, Stocks/Shares and Fund of Funds. All these areas will have a different level of risk associated to them and any portfolio built should reflect your personal appetite.

With each of the ETF’s, Mutual Funds and Fund of funds they will incur annual charges (typically between 0.1% and 2%)

Warning! Some firms, use “in house” or affiliated funds from which the firm and the adviser also take a % commission but with this will also have a tie in period. These firms also incentives to their advisers to choose these funds, regardless of the client or the client profile due to the financial gain for the adviser and firm.

Benefits of a ROPS

For those considering using a ROPS to unlock a pension scheme, you can look forward to enjoying a number of benefits.

Tax benefits of a ROPS

Income from UK pension arrangements is subject to income tax. It is collected as a withholding tax at 20%, and this tax is applied to everyone in receipt of UK pension income whether or not they live in the UK and with no exemption for foreign nationals.

No maximum Lifetime Allowance

Any growth in value of the ROPS above the value of the UK Lifetime Allowance (£1,073,100 2021/2022 to 2022/23) paid as a pension, will escape the 25% Lifetime Allowance excess tax charge. This charge would otherwise apply to any pension paid from a UK registered pension scheme to persons who are UK resident or non-resident for less than five years where the value of the pension exceeds the Lifetime Allowance.

However, from April 2024 the lifetime allowance for UK pensions is being abolished.

Inheritance and estate planning

As a ROPS is not under UK jurisdiction or tax laws, transferring your funds to a ROPS provides you with protection from UK inheritance tax – although your beneficiaries may be subject to local inheritance tax rules.

Overseas pension schemes will usually ensure that residual pension funds pass to the intended beneficiaries much easier and quicker than would be the case in the UK.

Dealing with the question of what happens on death for expats with a ROPS is more straightforward.

The nature of the scheme means that the pension fund is outside of the pension holder’s estate for the purposes of UK inheritance tax (IHT), so providing the beneficiaries receiving any unused funds are not tax resident in Britain, they get to keep the money. IHT rules may apply in the country where they are tax resident of course.

Currency options

ROPS and other overseas pension schemes allow for the payment of pensions in currencies other than Sterling, providing a valuable safeguard for expats.

Freedom of choice with a ROPS

As an expat you can move your pension funds into a QROPS ‘in specie’, which means you can use the same funds, but under the QROPS umbrella for tax shelter. Alternatively, you could invest in almost whatever mutual funds, shares, ETFs, gold funds, silver funds or bond funds that you choose.

Protect your investments

Depending on the jurisdiction chosen for the Overseas Pension Scheme, there is the potential for greater protection against creditors and other claimants than is typically available.

Accessing your funds

With a ROPS you will be able to access to your pension at 55 and also be able to receive an increased lump sum of 30% rather than the 25% if you have been offshore for 5 years.

If you desired, a ROPS also allows you to draw a higher pension income than in the UK.

A ROPS also enables you to get all your pensions transferred to the same place, where you can access them online whenever you want, giving you greater visibility.

Risks of a ROPS - and specifically rogue advisors mis-selling ROPS

One of the biggest risks faced with transferring to a ROPS is not the scheme itself, but whether it is the correct option to transfer your pension to a ROPS or whether it is being mis-sold.

Non-UK based advisors who get compensated through commissions rather than providing fee-based advice have used ROPS as a way to scam people out of their pension pots because they are not regulated by the FCA.

Advisors have been known to cold call extolling the virtues of ROPS while hiding specifics of the underlying funds, such as long tie in periods, high fees which are paid for through the pension pot and commissions for the advisor which are paid to the advisor up front.

If you are unexpectedly contacted by a "friendly" advisor who seems intent on making ROPS sound like the perfect retirement plan for you, you are advised to treat them with extreme caution and always get a second or third opinion before making any decisions or signing any contracts.

ROPS Qualifying Criteria

There are a number of criteria which you must satisfy to be eligible for a ROPS, including:

• You have a UK pensions (excluding state pensions) of any value
• You are planning to, or currently, live overseas
• You are not planning to return to the UK or you will at least be out of the UK for a minimum of 5 years
• You have not already purchased an annuity
• If yours is a final salary scheme, then the scheme should not be already in drawdown
• Investment allocation

UK pension funds often have a bias towards investment in UK assets. ROPS provide the scope for diversifying, as well as the option for more personalised investment management.

Frequently asked ROPS questions

Will I pay any more taxes on my pension after the ROPS transfer?

It will depend on the country you live in. Your pension will grow tax free and then the income tax you pay on drawdown depend on the laws of the country you live in and whether they have a Double Tax Agreement with the jurisdiction in which the ROPS is held.

Do I need to be offshore to move into a ROPS?

Yes, you need to be a non-resident of the UK to transfer any pension into a ROPS

When can I draw my pension?

As per UK pension rules, you will be allowed to withdraw funds from your pension once you reach 55 years old.

Can I move my residential properties into a ROPS?

No. ROPS only allow commercial properties such as shop houses, B&B’s, guesthouses and hotels.

What happens if I already have a ROPS?

For many years, commission driven sales people have recommended a QROPS to provide greater flexibility for the sale person to generate higher than average fees through commission both through the structure established and when using certain investments that incentivise the sales person to sell their products. QROPS previously did not offer the same scrutiny a UK Pension Trustee would do on the recommended underlying investments.

Can I move a ROPS back to a UK Pension?

Yes, you can move a ROPS back to a UK pension, however, before doing so you would need to consider:

• Exit fees applied by the Trustee (if any)
• Exit fees applied by your underlying investment custodian
• Penalties applied by underlying investment funds
• Whether the UK pension provider will allow for a transfer back if you are still a non-resident of the UK

Speak to a trusted expat pension specialist

If you are considering transferring pension funds into a ROPS, or have some questions about ROPS which you don't feel have been answered, request a free introduction to a trusted expat pension specialist.

As part of our introductory service, the advisor will arrange a free consultation which is designed to answer any questions and provide impartial assistance which will enable you to:

• Identify whether a ROPS transfer is suitable for you
• Clarify any costs, commissions or fees related to a ROPS transfer which you are unsure about
• Avoid the potential pitfalls of a ROPS transfer
• Get a second opinion about any advice you may have received - especially if you have been contacted out of the blue by an advisor extolling the benefits of ROPS
• Have peace of mind about any decisions you make

At no time will you be pressured into making any decision, neither will you be under any obligation to proceed with any advice.

Request your free introduction to an expat pension specialist >