PTM112300 - International: qualifying recognised overseas pension schemes (QROPS): what is a recognised overseas pension scheme
Glossary PTM000001
Section 150(8) Finance Act 2004
Regulation 3 The Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) Regulations - SI 2006/206
To be a recognised overseas pension scheme (ROPS) a scheme must meet all the following conditions:
- it is an overseas pension scheme (see PTM112200)
- it meets the requirements prescribed under the above regulations, meaning:
- The ‘Benefits Tax Relief Test’
- The ‘Pension Age Test’
- one or more of the Further requirements listed further down.
Overseas public service pension schemes and schemes set up by an international organisation to provide benefits to or in respect of their employees do not have to meet either The ‘Benefits Tax Relief Test’ or The ‘Pension Age Test’ to be a ROPS.
What is an overseas public service pension scheme?
Schemes set up by an international organisation
The ‘Benefits Tax Relief Test’
What is an overseas public service pension scheme?
Regulation 3(1B) The Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) Regulations 2006 - SI 2006/206
An overseas public service pension scheme is a pension scheme set up outside the UK either:
- by or under the legislation of its country or territory
- approved by the government of its country or territory.
The scheme must also have been set up solely to provide benefits to an individual for, or in respect of, services rendered to the scheme’s country, territory or any political subdivision or local authority of the country or territory.
Schemes set up by an international organisation
Regulation 2(5) The Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) Regulations 2006 - SI 2006/206
An ‘international organisation’ is an organisation to which section 1 of the International Organisations Act 1968 applies by virtue of an Order in Council under subsection (1) of that section. This category includes, for example, the United Nations.
It does not include multinational companies that operate or have subsidiaries in several countries.
The ‘Benefits Tax Relief Test’
Regulation 3(6) The Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) Regulations 2006 - SI 2006/206
The ‘Benefits Tax Relief Test’ was introduced with effect from 6 April 2012 and it applies to ROPS (see below for schemes that do not have to satisfy this test).
Where tax relief in respect of benefits paid from the overseas pension scheme is available to members of the scheme who are not resident in the country or territory in which the scheme is established, the same or substantially the same tax relief must:
- also be available to members of the scheme who are resident in the country or territory
- apply regardless of whether the member was resident in the country or territory:
- when the member joined the scheme;
- for any period of time when they were a member of the scheme.
For the purposes of this test, ‘tax relief’ means any tax relief available under the system of taxation of personal income in the country or territory in which the scheme is established. It includes the grant of an exemption from tax (except for an exemption that applies by virtue of any double taxation arrangements, that is an arrangement made between 2 countries to afford relief from double taxation).
Whilst the test is expressed in the context of the scheme and its members, it is always within the greater context of the country’s tax rules. If the country’s tax regime does not provide the conditions for the necessary availability of tax relief to both residents and non-residents, then schemes based in that country will not be able to meet this condition to be a recognised overseas pension scheme.
In the same way, if there is no tax relief available to members who are not residents in the country or territory where the scheme is established, then the ‘Benefits Tax Relief Test’ will always be met by schemes there. For example, if the country taxes benefits paid out of schemes established there regardless of residence and there is no tax relief provided for non-residents elsewhere in the tax legislation, the test is met. For the purpose of this test, any exemption provided due to a double taxation agreement is ignored.
If in a country there is tax relief of the kind tested here, then the same or substantially the same tax relief must apply to residents and non-residents of that country alike. There must also be no qualification affecting whether residents actually or readily receive the tax relief as compared to non-residents.
Example of an unacceptable qualification
Country X does not tax benefits paid out of a scheme established in Country X if they are paid to a non-resident. It is also possible for residents of Country X to claim exemption from tax on such benefits, provided they did not contribute to the scheme in any period in which they were resident in Country X. As the exemption in relation to residents is qualified, the ‘Benefits Tax Relief Test’ cannot be met. The scheme cannot be a ROPS and therefore cannot be a qualifying recognised overseas pension scheme (QROPS).
Schemes that don’t have to satisfy the ‘Benefits Tax Relief Test’
Regulations 3, 7 and 8 The Registered Pension Schemes and Overseas Pension Schemes (Miscellaneous Amendments) Regulations 2013 - SI 2013/2259
Since 14 October 2013 overseas public service pension schemes and schemes set up by an international organisation do not have to satisfy the ‘Benefits Tax Relief Test’.
Whether or not such a scheme had to satisfy the ‘Benefits Tax Relief Test’ at any point prior to 14 October 2013 depends on when the scheme became a QROPS, as follows:
- schemes that were a QROPS immediately before 6 April 2012 never had to satisfy the test
- schemes that became a QROPS after 5 April 2012 but before 14 October 2013 had to meet the test for the period up to and including 13 October 2013. After that date they no longer have to meet the test.
The ‘Pension Age Test’
Regulation 3(6A) The Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) Regulations 2006 - SI 2006/206
The following guidance relates to the conditions in place from 6 April 2017. For guidance on the conditions in place before that date see the guidance on the National Archives.
The ‘Pension Age Test’ test sets a limit for the earliest age from which benefits can be paid to the member and the scheme retain the ability to meet the requirements to be a ROPS. This age limit applies to any benefit payment - both pensions and lump sums. Benefits payable to the member, to the extent that they relate to the transfer, must not be payable earlier than normal minimum pension age (see PTM062100) unless that payment would be an ‘authorised payment’ if it had been made by a registered pension scheme.
In practice this means that, apart from the following named lump sums, a payment may only be made to a member aged under 55 (under age 57 from 6 April 2028) if they are retiring due to ill-health (see PTM062100).
The following lump sums may be paid to a member aged under 55 (under age 57 from 6 April 2028) as authorised payments from a registered pension scheme:
- a serious ill-health lump sum - see PTM063400 for payment conditions
- a short service refund lump sum - see PTM045000 for payment conditions
- a refund of excess contribution lump sum - see PTM045000 for payment conditions
- a winding-up lump sum - see PTM063600 for payment conditions.
Lump sums that are the equivalent of these lump sums may be paid to a member aged under 55 (under age 57 from 6 April 2028) and the scheme still satisfy the ‘Pension Age Test’.
The conditions for paying these lump sums are set by legislation. HMRC has no discretion in this area. So, if a member aged under 55 (under age 57 from 6 April 2028), who is not retiring due to ill-health, is entitled to a payment under the scheme and such a payment would not meet all the prescribed payment conditions of one of the 4 lump sums listed above, the scheme cannot satisfy the ‘Pension Age Test’. It does not matter that the member has not actually received one of these payments; if they are entitled to that payment under the scheme, the scheme cannot satisfy the ‘Pension Age Test’.
The ‘Pension Age Test’ does not apply to Schemes set up by an international organisation or overseas public service pension schemes (see What is an overseas public service pension scheme? above). The ‘Pension Age Test’ applies to all other schemes regardless of where the scheme is established.
This test applies from 6 April 2015. Any scheme that previously met the conditions to be a ROPS can only continue to be a ROPS if on or after 6 April 2015 it meets the conditions of the ‘Pension Age Test’.
The test is an ongoing test; it doesn’t just apply at the point the scheme receives a transfer of funds that have benefitted from UK tax relief.
How this test can be met depends on the country in which the scheme is established. A scheme may be able to meet the ‘Pension Age Test’ without having a specific scheme rule that sets a lower age limit on when benefits may be paid. For example, one of the ways that the test could be met is for the scheme rules to include a specific payment age provision. However, this will not be needed if the law of the country in which the scheme is established:
- sets a minimum payment age for the scheme concerned of no lower than the normal minimum payment age for registered pension schemes
- if earlier payment due to ill-health is possible the standard that must be met for early ill-health payment is not lower than the ill-health condition set out at paragraph 1 schedule 28 Finance Act 2004.
Any such law must stop or prohibit schemes paying benefits before normal minimum pension age in order to meet the requirements to be a ROPS.
To meet the ‘Pension Age Test’ the pension scheme rules will have to apply the restriction on when benefit can be paid, if either:
- there is no legislative prohibition on when schemes can pay benefits
- any legislative restriction sets a lower minimum pension age or lower standard to the ill-health condition.
If the scheme rules do not contain the required restriction and the scheme is not prohibited by the law of the country in which the scheme is established from paying benefits before normal minimum pension age, the scheme cannot be a ROPS and so cannot be a QROPS.
If in respect of transferred funds the scheme does not act in accordance with its rules, or any law, prohibiting the payment of benefits before normal minimum pension age, the scheme will not meet the requirements of the ‘Pension Age Test’. Such a scheme cannot be a ROPS and so cannot be a QROPS.
Further requirements
The following guidance relates to the conditions in place from 6 April 2017. For guidance on the conditions in place before that date see the guidance in the National Archives.
To be a ROPS the overseas pension scheme must be established in either:
- a Member State of the European Union, Norway, Liechtenstein or Iceland
- a country or territory with which the UK has a double taxation agreement that makes provision for exchange of information
- a country or territory with which the UK has a tax information exchange agreement (TIEA).
If the scheme is established in Guernsey and approved under section 157E of the Income Tax (Guernsey) Law 1975 it must also be closed to non-residents.