QROPS pensions in Spain

What is a QROPS?

A QROPS is an international pension scheme for expat UK pension holders who wish to remove their pension from the UK. These plans are registered with HMRC and have to follow certain rules. They offer potential tax benefits and freedom from the UK pensions regime.

In 2006 the UK government finally gave in to pressure from the EU and started allowing anyone with a UK pension who planned on moving aboad to take that pension with them. This was known as 'A day' in the pensions world and formed part of a much wider reform of UK retirement rules. This is when the acronym QROPS was founded. It stands for 'qualifying recognised overseas pension scheme'. HMRC then published a list of companies and trustees who had declared themselves providers of QROPS pensions. This new type of pension could benefit those living in Spain. Although not 'approved' by HMRC as such these entities had to comply with certain rules set out in order to remain listed. Rules which broadly followed the UK pension regime. These rules have been tightened and refined over the years since 2006 resulting in a considerably reduced amount of providers as well as many jurisdictions (such as Australia and New Zealand) becoming largely inappropriate. Malta (EU) is now the main country where QROPS providers and trustees are located. It should be noted that the 'Q' is sometimes dropped by government and insitutions and referred to as ROPS but they are one and the same.

So, fast forwarding to 2020 - here are the main points to consider when contemplating a potential transfer of your UK pension.

1) Why are QROPS in Malta?

QROPS providers in Europe are usually in Malta because they should be inside the European Economic Area (EEA) - which of course includes Spain. A transfer where the QROPS trustees are outside of this zone and/or the scheme member resides outside of this zone will likely carry a 25% transfer charge to HMRC.

In the past there were QROPS providers in New Zealand, Australia and The Channel Islands among other places. The main locations are now Malta, Gibraltar and the Isle of Man. So why not Spain itself? Simply put, there are no institutions in Spain set up to receive and administer UK pension transfers. Although there were some banks such as Santander previously on the list, in practice they were never used and have now been removed completely. The preferred jurisdiction for residents of Spain has always been Malta. And the reasons for this choice are now stronger than ever following the 2017 rule changes. They are:
a) Malta has a strongly regulated and advanced financial services sector with all the main QROPS providers operating from there.
b) Malta has a dual tax treaty in place with Spain ensuring that tax cannot be paid twice.
c) Malta is inside the EEA so residents of Spain are not subject to the overseas transfer charge.
d) With all UK schemes and QROPS, benefits cannot be taken before age 55 (accept in special circumstances such as severe ill health for example). However, Malta allows flexible access to QROPS pensions post age 55 - meaning you can take as much as you want, when you want it (although one has to be mindful of potential tax implications in Spain).
Gibraltar and The Isle of Man may be alternatives for UK scheme members living in Spain who are younger than 55 but once benefits can be taken they do not offer the same tax efficiency.

Why transfer to a QROPS?

1. To combat the effects of Brexit. Increasing numbers of UK pension providers are forcing members who are living outsiee the UK at retirement benefit age (55) to either buy an annuity (restrictive and poor value - nothing to pass on to spouse/partner or beneficiaries) or transfer to a QROPS.

2. To mitigate currency risk. You can choose to have your overseas pension in Euros thereby avoiding future fluctuations in the exchange rate. You can also keep it in Sterling or have a mixture of both.

3. Avoid UK inheritance tax. An overseas plan can show a clear intent to cut ties with the UK - thus reducing the danger of a UK inheritance tax liability upon your death.

4. Because Spain recognises EU pensions. Following changes to EU law, Spain is more likely to view a QROPS as a personal pension (rather than a personal investment. Personal pensions in the UK do not fall under this classification anymore.

5. To avoid UK Lifetime Allowance charges. There are no lifetime allowance restrictions with a QROPS. Important to note that the UK government have announced in the 2023 Budget that they will abolish the LTA from April 2023. HOWEVER the Labour party have pledged to bring it back if they win the next general election - likely 2024.

6. Because you can consolidate all your UK pensions into one, easy to understand plan.

7. To get 'Flexible Access' - post age 55 take what you want, when you want it. No capped draw down restrictions.

8. To help with divorce and creditor proofing. A UK court can order pension funds to be handed over or shared. This is much harder with a QROPS where the UK court has no jurisdiction.

9. To obtain a larger lump sum of 30% free from UK tax.

10. To benefit from EU based financial advice. Using an adviser familiar with the Spanish system combined with a QROPS will make it easier to keep track of tax and regulation changes in your country of residence.