UK: Transferring A Pension Overseas

Last Updated: 16 September 2007

In the first of a series of articles on international pension planning, we look at new, less restrictive rules for transferring pensions overseas.

Following the introduction of pensions simplification on 6 April 2006, radical changes were made to the rules governing transfers from UK-registered schemes to offshore pension schemes.

Very simply, individuals who migrate from the UK are able to transfer their UK pension funds to an overseas pension scheme, provided it is a qualified registered overseas pension scheme (QROPS) listed on the HMRC website.

A transfer can also be made in anticipation of leaving the UK, as long as there is an intention to do so within the next ten years.

There are no other formalities other than the UK pension provider satisfying itself that the transferee pension scheme is on the approved list of QROPS and that the individual is a member. Furthermore, providers must notify HMRC that the transfer has been made if the individual is resident in the UK at the time or was resident in one of the previous five tax years. The QROPS then undertakes to HMRC to comply with a number of procedures.

Notably, they are obliged to report future payments made to individuals who are either resident in the UK in the year of payment or who were resident in one of the previous five tax years. This enables HMRC to establish whether the QROPS has made a payment which, had it been made from a UK scheme, would have been an unauthorised payment.

If HMRC decides that the payment is unauthorised, it will raise an assessment on the member of the QROPS. The member will then be responsible for settling this tax liability and, if he or she is resident overseas, this will be policed with the help of the tax authorities in the overseas jurisdiction. Consequently, QROPS can only be established in those countries with which the UK has a double taxation agreement.

Advantages Of The New Rules

The new rules governing transferring pensions overseas will give some migrating individuals significant advantages. Some jurisdictions do not give tax relief on pension contributions while others allow a lump sum pension payment to be made free of all local taxes. It might be possible to avoid tax on a pension fund, subject to the payment being made outside of the QROPS reporting window referred to above.

Potential Traps

However, there are traps for the unwary, particularly where tax rules governing pensions in the overseas jurisdiction are more onerous.

For example, what may have been tax-free cash in the UK could be converted into a taxable pension overseas. This has to be weighed up against any tax liability there might be in the overseas jurisdiction on the same tax-free cash, had it come from the UK scheme.

It is very important to check the double taxation treaty between the UK and the overseas jurisdiction to ensure there are no unpleasant surprises.

Finally, it should be stressed that tax considerations are one of a number of points that need to be looked at carefully when considering a transfer out of any UK pension scheme. You must also assess whether the transfer represents good value, particularly where it comes from a defined benefits scheme.

Summary

All in all, the new international pension planning rules are much less restrictive, particularly as transfers can now be made in anticipation of a move overseas.

In the next edition of Financial & Tax Planning, we will look at tax relief on contributions into international pension schemes by individuals resident in the UK.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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