British expats can transfer their UK pension savings to a pension in another country – but they could fall foul of tax implications.
HM Revenue & Customs supervises pension international pension transfers and starts with the view that the money should receive the same tax treatment abroad as if remaining in the UK.
Savers can switch their UK funds to an offshore scheme that follows these rules.
These pensions are called QROPS – short for Qualifying Recognised Overseas Pension Schemes.
In the 2018-19 tax year, 5,000 expats transferred UK pensions worth £640 million to a QROPS, according to the latest statistics from HMRC – a 6% increase in the number of transfers over the previous year.
The average fund transfer was valued at £128,000.
Since QROPS were introduced in April 2006, more than 128,000 expats have shifted £11.4 billion of UK pension savings overseas.
Overseas means anywhere other than England, Scotland, Wales and Northern Ireland – but beware of the overseas transfer charge.
QROPS list Catch-22
The rules on QROPS are strict. The administrators must provide HMRC with detailed information about the pension and the savers in the scheme. If they don’t, the pension is no longer classed as a QROPS and tax penalties can apply.
Finding out if a pension is QROPS comes with a Catch-22.
HMRC publishes a list of current QROPS every couple of weeks – typically on the first and 15thof the month.
But HMRC explains the entries on the list are self-certified and if a pension turns out not to qualify as a QROPS, the saver could face tax penalties.
“You’ll need to check that the scheme you’re transferring to meets QROPS requirements,” says HMRC.
“HMRC cannot guarantee these are QROPS or that any transfers to them will be free of UK tax. It’s your responsibility to find out if you have to pay tax on any transfer of pension savings.
“HMRC will usually pursue any UK tax charges and interest for late payment arising from transfers to overseas entities that do not meet the QROPS requirements even when they appear on this list.
“This includes where the QROPS requirements have changed and where taxpayers are overseas.”
Tax consequences of an unauthorised QROPS transfer
HMRC defines QROPS transfers as authorised and unauthorised.
An authorised transfer is to a QROPS without breaking any rules, while an unauthorised transfer is one outside the QROPS scheme.
The tax consequences for expats are stern.
First, expect to pay a penalty equal to 40% of the unauthorised transfer value, then add another 15% of the fund value if the saver has taken more than 25% of the fund in benefits in 12 months.
The penalties are subject to interest and late payment penalties as well.
Breaching the lifetime allowance
The lifetime allowance (LTA) is a cap on how much any individual can save into pensions and is set at £1.055 million for the 2019-20 tax year.
An unauthorised transfer doesn’t count towards the lifetime allowance.
An authorised transfer is tested against the lifetime allowance when the fund is switched out of the UK. If the transfer is more than the allowance, penalties are due, but if it is less, then the transfer goes ahead and the money is no longer subject to the LTA while in a QROPS.
Avoiding the overseas transfer charge
With a bit of nifty thinking, the overseas transfer charge is not as bad as it sounds.
The overseas transfer charge (OTC) is a 25% levy on the value of the transfer for moving funds if none of these rules apply:
- The pension saver must live in the same country where the QROPS is based – so someone taking out an Australia QROPS should live in Australia.
The exception is a QROPS saver living in the European Economic Area (EEA). Providing their QROPS is based in the EEA, they can live in any member country.
- THE QROPS is run by by an international organisation, such as the United Nations, the European Union or the Red Cross for employees
- The QROPS is an overseas public service scheme or occupational pension scheme and the saver is an employee of the sponsoring organisation
- The transfer took place after March 9, 2017
A pitfall to watch for is expats may be outside the OTC rules when the QROPS transfer was made, but are caught in the rules if their circumstances change because they move countries within five years of the transfer date.
The five-year rule works in favour of some expats, who paid the charge at the start of the five years, but become exempt during the period. They can claim an OTC refund.
In specie QROPS transfer trap
In specie is the Latin term meaning ‘actual form’ – for instance putting a building worth £750,000 into a pension rather than the cash representing the value.
But confusion can arise between an ‘in specie transfer’ and an ‘in specie contribution’ – and not all QROPS will accept these transfers.
So what’s the difference between in specie transfers and contributions?
An in specie transferinvolves switching assets already within a pension to another scheme and involves valuing and transferring title from the UK pension to the QROPS.
An in specie contributionis paying an asset into a pension which is not already in a pension without converting the value to cash.
HMRC is not keen on these contributions and is investigating a couple of dozen UK self-invested personal pensions (SIPPs) for abusing the rules. The tax authority claims the assets are overvalued resulting in too much tax relief paid.
Most SIPP and QROPS providers have put the brakes on in specie contributionsdue to pressure from HMRC.
The result is in specietransfersare OK but in speciecontributionsare on hold.
Switching from a QROPS back to a UK pension
There are lots of reasons why expats may want to come home and bring their pensions with them.
Family issues, the end of assignments and Brexit uncertainty are just a few.
The good news is almost all transfers from a QROPS to a UK pension are allowed – providing the receiving fund agrees.
As a transfer, the incoming fund does not attract tax relief and does not count against the lifetime allowance – but will count towards the LTA when abenefit crystallisation event (BCE) arises before the age of 75.
The transfer also enhances the saver’s LTA by the same percentage as the transfer reflects against the standard lifetime allowance.
This sounds complicated, but isn’t really if you follow the example:
- Amanda switches £105,000 from her QROPS to a UK pension in 2019-20.
- Divide the transfer value by the standard LTA (£105,500/£1,055,000)
- The ratio/percentage shows Amanda’s enhanced LTA is 10% higher than the standard LTA for the transfer
- Amanda’s enhanced LTA is now set 10% higher than the standard LTA to reflect the transfer had no tax relief.
Amanda has five years from the date of the transfer to claim the enhanced LTA