Financial campaigners have slammed government plans to make people living in the UK pay more tax on benefits paid from offshore pensions as unfair.
The Low Incomes Tax Reform Group (LITRG) says the measure not only means people will pay extra tax, but many will also incur other costs before they are paid.
Current rules give a 10% discount on pension payments from overseas received in the UK, which effectively means tax is only charged on 90% of their income.
To bring the tax in line with the amount paid on money from British based pensions, the government wants to axe the discount and charge tax on all payments into the UK from overseas pensions.
Charges grab too much from less well-off
The LITRG argues this will impact the incomes of less well-off pensioners because the cost of accessing money from overseas is the same as that for wealthy pensioners.
LITRG chairman Anthony Thomas said: “The proposed increase in tax on foreign pension income hits people on low incomes hardest because the change will be mainly felt by those with monthly pension income in the tens or low hundreds of pounds rather than those in the thousands.
“We are talking about pensioners who may be paying £7 to £9 in exchange charges each month. They may also have to pay international call costs to deal with the pension, and deal with complex proof of life processes each year from the country of origin.”
Foreign pensions are set up by British expats while living and working overseas and may come from either governments or private companies.
Call for pension tax cap
One popular offshore pension is the Qualifying Recognised Overseas Pension Scheme (QROPS), which is a private pension like a UK SIPP.
The LITRG accepts the tax measure is designed to stop tax avoidance from expats moving overseas, setting up a pension and then moving back to the UK and claiming the tax discount.
“A capped 10% tax rule would benefit all recipients of foreign pensions to some degree but especially the disproportionate impact of those costs on people with smaller foreign pensions,” said Thomas.
The LITRG has also called on the government to stop asking people receiving cash from overseas pensions to fill in tax returns.