Double Dipping: How QROPS Created Tax-Free Cash Opportunities in UK Pensions (And Why It's No Longer Possible)

Since the abolishment of the LTA, an unexpected "loophole" was created. Savvy pension planners utilized Qualifying Recognised Overseas Pension Schemes (QROPS) to access what became known as "double dipping" - a strategy that allowed individuals to extract tax-free cash from their pension pots not once, but twice. This practice, while technically legal, created significant concern for HM Revenue & Customs and ultimately led to regulatory changes announced in the 2024 Autumn budget, that have effectively closed these opportunities.

Understanding the Double Dipping Strategy

The double dipping strategy leveraged specific rules within the QROPS framework that allowed pension holders to:

Take their 25% tax-free Pension Commencement Lump Sum (PCLS) from their UK pension
Transfer the remaining 75% to a QROPS in another jurisdiction
Take a second tax-free lump sum from the overseas scheme, effectively accessing tax-free cash twice

This practice was particularly attractive for expatriates or those planning to retire abroad, as it could significantly increase the tax efficiency of their retirement planning. The ability to extract two separate tax-free lump sums provided substantial financial benefits compared to keeping funds within the UK pension system.

Alternatively, a portion of pension benefits (up to the overseas transfer allowance), could be transferred abroad, of which 25% could be paid out as tax free cash. The residual of the benefits could be retained in the UK, likewise paying a 25% tax free cash entitlement. This double dipping would be beneficial if the tax free cash entitlement was in excess of £268,275 (which is 25% of the liftime allowance amount when it was abolished, namely £1,073,100).

The EEA Connection

A critical component that enabled double dipping was the European Economic Area (EEA) exclusion criteria. Previously, HMRC rules stated that a QROPS transfer would not be subject to the overseas transfer charge if:

The member was resident in the EEA
The QROPS was established in the EEA

This meant that a UK pension holder could transfer their pension to a QROPS in any EEA country (not just their country of residence) without incurring the overseas transfer charge, which was levied at 25% of the transfer value. Furthermore, the liability of this charge rested on the pension benefits for 5 full tax years after the date of transferring.

Government Intervention: Closing the Loophole

The UK government recognized that the EEA residency rules were creating unintended tax advantages. In response, they implemented several key changes to eliminate double dipping opportunities:

1. Same-Country Requirement

The most significant change was the introduction of the "same-country" requirement. As of the day the budget was announced, to avoid the overseas transfer charge, both:

The pension member must be resident in the same country where the QROPS is established

This effectively eliminated the ability to "jurisdiction shop" for favourable tax treatment within the EEA.

2. Stronger Anti-Avoidance Measures

Additional anti-avoidance measures were implemented, giving HMRC greater powers to challenge arrangements they consider to be primarily tax-motivated rather than genuine retirement planning.

3. QROPS falling under IHT assessment

With the announcement that, as of April 2027, pensions will be assessable to UK inheritance tax, the HMRC forsaw an exodus of pension plans from the UK landscape into QROPS. To eliminate the advantage that offshore pensions would potentially provide IHT domiciled individuals, it was announced that QROPS will also be assessed against IHT (similarly to UK pensions).

Implications for Pension Planning Today

For financial advisors and their clients, these regulatory changes have profound implications:

QROPS transfers now require careful consideration of genuine residency status
The tax benefits of QROPS are more closely tied to legitimate relocation plans
Short-term tax advantages through jurisdiction selection are no longer viable
Long-term planning is essential, with a focus on the ten-year reporting period

Is QROPS Still Relevant?

Despite the elimination of double dipping opportunities, QROPS can still offer significant benefits for genuine expatriates who are permanently relocating outside the UK. These benefits include:

Currency flexibility for those living permanently abroad
Potential inheritance tax advantages
Access to a wider range of investment options
Protection from future changes to UK pension legislation

Conclusion

The era of "double dipping" through QROPS has come to a definitive end through targeted government action. The removal of the EEA exclusion and introduction of the same-country requirement have effectively closed what was once a significant tax planning opportunity.

For financial advisors, this underscores the importance of staying current with regulatory changes and focusing on sustainable, compliant pension planning strategies. While opportunistic approaches like double dipping may offer short-term gains, they typically lead to regulatory responses that can undermine long-term financial planning.

As the pension landscape continues to evolve, the focus should remain on transparent, ethical planning that aligns with both the letter and spirit of pension regulations.