UK Pension Transfers to Overseas Pension Funds
Some Background - QROPS
On April 6, 2006 a new pension transfer regime became applicable to transfers out of UK pension funds into foreign pension schemes. From that time onwards, in order to avoid very significant taxation, pension transfers out of the UK had to be made to funds certified as Qualifying Recognised Overseas Pension Schemes (QROPS).
In summary, the major changes introduced included:
- Transfers out of UK registered pension schemes being tested against a lifetime allowance (LTA) and any amounts transferred above this level would be taxed at a rate of 25%.
- Transfers below the LTA did not attract tax charges as long as the receiving overseas scheme is a QROPS.
- Transfers to an overseas scheme which was not a QROPS would be treated as unauthorised payments and attract tax charges of 40%, or higher.
Following that announcement, a very large number of pension funds on a worldwide basis applied for and received QROPS status, with HMRC maintaining a list of qualifying funds on its website. Apart from registration, any QROPS needs to meet very specific reporting requirements to HMRC for a period of 10 years (originally 5 years, but extended in 2012) after the date of the last transfer from the UK.
In early April, 2015 the UK enacted a change to its pension regulations effectively prohibiting any access to a pension prior to age 55 unless for reasons of "serious ill health". They then contacted all QROPS funds worldwide and sought confirmation that they complied with this requirement. The major impact was the exclusion of almost all Australian superannuation funds, as they did provide access to pension funds prior to age 55 in a limited number of situations apart from ill health (severe financial hardship, DASP payments etc.,) and needed to change their Trust deeds to accommodate this change. In fact, as at 1 July 2015 only one Australian fund was listed - the Local Government Superannuation Scheme (LGSS) in Queensland. In practice, from this time onwards direct transfers to Australia became limited to individuals aged 55 and above.
We need to stress that none of these changes required expatriates to transfer their pension; you may continue to leave it in the UK and eventually receive a sterling pension. You should not assume that because a pension is capable of transfer/withdrawal means that this is the correct option and this is the first issue that needs to be addressed in terms of obtaining professional advice. This is particularly the case with “final salary” or “defined benefit” schemes - where pensions are based on the member’s salary and length of service. The transfer value of these pensions are basically the present day cash value of deferred retirement income commitments made by employers and they depend on a range of factors, including interest and investment rates of return. It is now a legal requirement that professional advice is obtained in the UK before a transfer out of a defined benefit scheme unless the value is below a certain minimum value.
Introduction of the Overseas Transfer Charge (OTC)
In early March 2017 HMRC announced that the introduction of a 25% overseas tax charge (OTC) with effect from March 9, 2017. In very general terms the OTC will apply if none of the following conditions apply:
- the member is resident in the same country in which the QROPS receiving the transfer is established
- the member is resident in a country within the European Economic Area (EEA) and the QROPS is established in a country within the EEA
- the QROPS is set up by an international organisation for the purpose of providing benefits for or in respect of past service as an employee of the organisation and the member is an employee of that international organisation.
- the QROPS is an overseas public service pension scheme and the member is an employee of an employer that participates in the scheme
- the QROPS is an occupational pension scheme and the member is an employee of a sponsoring employee under the scheme
A literal reading of these conditions suggests that direct pension transfers can continue to occur into QROPS funds but the measure is intended as deterring indirect transfers, to places such as Malta, Gibraltar and New Zealand - unless the member is resident in those countries or the EEA in some cases.
Should you wish to make an inquiry through Exfin about the transfer of a UK pension, or are seeking professional advice in a related matter, please click on the link at the bottom of this page.