How Brexit Will Affect UK Pension Transfers Abroad
Contributed by QROPS Specialists
19 December, 2019
Qualifying Recognised Pension Schemes or QROPS were very popular vehicles to hold UK tax relieved retirement monies before 2017; however, many new rules have been put in place that make them less attractive unless you have a large pension pot or are in ill health.
Before April 6th, 2017, if you were moving abroad, most expats looked into the possibility of transferring their UK pensions to a QROPS.
However, since that time, the UK government have established a number of changes to pension regulations that has made the transfer of UK pension schemes to QROPS less desirable. We will explore them in this article.
There were refinements made to the QROPS rules back in April 2017 to include new amendments to ensure that UK pension pot members were not using tax loopholes to avoid the payment of tax on their UK pension schemes, even whilst abroad. A number of new rules were established which led to a severe reduction in outflows into QROPS.
In the latest UK election, the Conservative Party won a solid majority and they ran on the policy of a quick Brexit. For advisers, the new rules and Brexit will make giving advice more complex than before with regards to UK pension transfers overseas.
It is important to contact a QROPS specialist and overseas tax attorney to discuss the best options for UK tax relieved pension monies.
Many clients will miss the window to transfer a UK pension overseas before Brexit as a typical transfer can take 3 months or more. However, some pension companies have stream lined the process.
First, let's look at some of the most recent changes in the legislation surrounding UK pension transfers abroad.
Recent QROPS Rule Changes 2019
New legislation was added to the Finance Bill in 2017 so that:
Transfers to QROPS requested on or after 9 March 2017 will face an Overseas Transfer Charge (OTC) of 25% on any funds transferred overseas, unless at least one of the following apply:
- both the individual and the QROPS are in the same country after the transfer
- the QROPS is in one country in the EEA (an EU Member State, Norway, Iceland or Liechtenstein) and the individual is resident in another EEA after the transfer
- the QROPS is an occupational pension scheme sponsored by the individual's employer
- the QROPS is an overseas public service pension scheme as defined at regulation 3(1B) of S.I. 2006/206 and the individual is employed by one of the employer's participating in the scheme
- the QROPS is a pension scheme established by an international organisation as defined at regulation 2(4) of S.I. 2006/206 to provide benefits in respect of past service and the individual is employed by that international organisation
- UK tax charges will apply to a tax-free transfer if, within five tax years, an individual becomes resident in another country so that the exemptions would not have applied to the transfer
- UK tax will be refunded if the individual made a taxable transfer and within five tax years one of the exemptions applies to the transfer
- The scheme administrator of the registered pension scheme or the scheme manager of the QROPS making the transfer is jointly and severally liable to the tax charge and where there is a tax charge, they are required to deduct the tax charge and pay it to HM Revenue and Customs (HMRC). This applies to scheme managers of former QROPS that make transfers out of funds that have had UK tax relief, if the scheme is a QROPS on or after 14 April 2017 and at the time the transfer to the former QROPS is received
- Payments out of funds transferred to a QROPS on or after 6 April 2017 will be subject to UK tax rules for five tax years after the date of transfer, regardless of where the individual is resident
Should I Transfer My UK Pension Overseas in 2019/20
These new pension amendments mean that you can no longer transfer your pension scheme to a 3rd jurisdiction, otherwise you would get hit with a 25% Overseas Transfer Charge (OTC).
So, you must transfer your pension to the same territory that you will be resident in retirement.
Before 2017, you could move to a "3rd jurisdiction" such as New Zealand, the Isle of Man, Guernsey, Gibraltar or Malta without incurring any exit penalty. From April 6th, 2017, you would be penalized with a 25% OTC if you are not moving to the territory that your QROPS is held.
You must also remain resident in that territory for at least five years or face a retrospective 25% OTC.
Countries that will avoid the 25% Overseas Transfer Charge as long as you remain resident there for five years subsequent to the pension transfer:
- If you are moving to a QROPS in Australia as a resident in Australia
- If you are moving to a QROPS in New Zealand as a resident in New Zealand
- If you are moving to a QROPS in Malta as a resident in the European Economic Area
- If you are moving to a QROPS in India as a resident in India
If you move elsewhere in the world, you are likely to face the 25% Overseas Transfer Charge (OTC) unless your company has set up a final salary QROPS scheme abroad.
The Brexit Effect on QROPS
Once Brexit is finally triggered, if you move your pension to a QROPS and you are still resident in the UK, you will be hit with an immediate 25% overseas transfer charge upon transfer. You would then have to claim this back at a later date when you can prove that you are tax resident abroad.
Before Brexit, this wasn't the case. You could transfer a pension abroad, even if you were still resident in the UK without incurring the overseas tax charge.
This may be particularly troublesome for those near the pension "lifetime allowance" (LTA) which stands at 1,000,000 GBP for 2019.
For pension members nearing the LTA, who wanted to transfer their pensions abroad whilst still tax resident in the UK, they would have to pay the Overseas Tax Charge of 25% upfront, then claim that tax back at a later date.
Another option is to wait until you move abroad and stop contributing to your pension pot today or keep contributing to your UK pension pot and pay up to 55% income tax on any lump sums you receive from the pot over 1m GBP.
QROPS Advice in 2019/20
There are also other QROPS rules which are country specific. In Australia, for example, you must be over the age of 55 to transfer to a QROPS there.
In many cases, an international SIPP may now be preferable to a QROPS, particularly for small or modest pension pots. It is important to discuss all the options with a financial adviser, in particular, with respect to how exchange rates can affect your pension income, how your pension pot will be taxed upon death, the naming of beneficiaries, a client's risk profile, as well as their health condition.
About QROPS Specialists
QROPS Specialists are UK pension transfer specialists. We specialise in giving tailored advice for transferring UK pensions overseas.
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