International: qualifying recognised overseas pension schemes (QROPS): what is a recognised overseas pension scheme
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), and
- it meets the requirements prescribed under the above regulations, meaning:
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, or
- approved by the government of its country or territory.
The scheme must also have been set up for the purpose of providing 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’ as 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 the United Nations and the European Union.
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; and
- apply regardless of whether the member was resident in the country or territory:
- when the member joined the scheme;
- or 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 two 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 & 8 The Registered Pension Schemes and Overseas Pension Schemes (Miscellaneous Amendments) Regulations 2013 - SI 2013/2259
From 14 October 2013 overseas public service pension schemes and schemes set up by an international organisation no longer 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 ‘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 the member is retiring due to ill-health (see PTM062100).
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 pensions scheme, and
- if earlier payment due to ill-health is possible the standard that has to 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
- there is no legislative prohibition on when schemes can pay benefits, or
- 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.
To be a ROPS the overseas pension scheme must satisfy at least one of the two tests below:
This is a test of location / scheme type. At least one of the following points must be satisfied:
- the scheme must be established in a Member State of the European Union, Norway, Liechtenstein or Iceland, or
- the scheme must be established in a country or territory, other than New Zealand, with which the UK has a Double Taxation Agreement that contains exchange of information and non-discrimination provisions, or
- the scheme must satisfy the requirement that, at the time of the recognised transfer in, the transfer is made to a pension scheme which is a ‘KiwiSaver’ scheme as defined in section 4(1) (interpretation) of the KiwiSaver Act 2006 of New Zealand.
This test requires that, at the time of the recognised transfer into the overseas pension scheme, all four of the following sub-requirements are met:
- the rules of the scheme are such that at least 70 per cent of the funds transferred in will be designated by the scheme manager for the purpose of providing the member with an income for life,
- the rules of the scheme are such that the pension benefits (and any associated lump sum) payable to the member under the scheme, to the extent that they relate to the transfer, are payable no earlier than normal minimum pension age (see PTM028000 - usually age 55) or earlier ill-health,
- the rules of the scheme are such that membership of the scheme is open to persons resident in the country or territory in which it is established, and
- if the scheme is established in Guernsey and is an exempt pension contract or an exempt pension trust under s157E of the Income Tax (Guernsey) Law 1975, then the scheme must not be open to non-residents of Guernsey.
The expression ‘income for life’ is not defined in the tax law. It takes its ordinary meaning.