UK: Ongoing Scheme Funding - Internationally Mobile Workers - Pensions In 30 Podcasts, Episode 11

What are the rules on membership of a UK pension scheme by someone who doesn't live or work in the country? Here, we take a look at the issue of overseas pensions and internationally mobile workers, providing clarity on the current restrictions, cross-border authorisation and approval and migrant member relief.

Download podcast

Subscribe via iTunes

Download the fact sheet here.

Key Points

  • There are no statutory restrictions on membership of a UK pension scheme by persons who do not live or work in the United Kingdom.
  • Restrictions on benefits accrued or provided under a registered pension scheme may be relaxed where a member does not benefit from UK tax relief because he or she is a "relevant overseas individual" or a transfer has been made into the scheme from a "recognised overseas pension scheme".
  • A registered pension scheme may only make a transfer into an overseas pension scheme that is approved for the purpose by HMRC (a "qualifying recognised overseas pension scheme" - QROPS).
  • Transfers to a QROPS (and onwards from a QROPS to another QROPS) are subject to the Overseas Transfer Charge (OTC) of 25% of the transferred value from 9 March 2017, unless certain exemptions apply.
  • A member who comes to the UK as an existing member of a qualifying overseas pension scheme may benefit from migrant member relief on UK income tax.
  • A scheme may only accept contributions from a "European Employer" if it is authorised to act as a cross-border pension scheme. Onerous funding requirements apply to cross-border defined benefit schemes.
  • Despite the first bullet point above, it is worth noting that having a scheme member who is subject to the labour and social security laws of another EEA state (i.e. who works elsewhere in the EU in a scheme) makes that a cross-border scheme with onerous funding consequences.
  • The European parliament and Council has agreed a revised IORP Directive (IORP II) which will make changes to cross-border pension arrangements (subject to how the Directive is applied in the UK as a result of the UK leaving the EU).
  • Changes to the taxation of "Foreign Pensions" from 6 April 2017 are substantial.

Main sources

  • Pensions Act 1995
  • Pensions Act 2004
  • Finance Act 2004
  • Occupational Pension Schemes (Cross-border Activities) Regulations 2005 ("Cross-border regulations")
  • Institutions for Occupational Retirement Provision (IORP) Directive
  • Directive on the Activities and Supervision of Institutions for Occupational Retirement Provision (IORP II)

Overview

There are no statutory restrictions on membership of a UK pension scheme by persons who do not live or work in the United Kingdom. Indeed, the Pensions Act 1995 disapplies any provision of an occupational pension scheme which has a discriminatory effect against persons who are not wholly or partly employed in the UK.

Where somebody who does not live in the UK accrues benefits under a UK pension scheme, the following consequences may follow:

  • UK tax relief may not be available on the person's contributions;
  • the person may be relieved from restrictions on the size of the benefits that he or she may accrue under the scheme (this is known as "international enhancement"); and
  • where the scheme is an occupational scheme and the person is employed in another state which is within the European Economic Area, the trustees of the scheme may be obliged to obtain authorisation to operate as a cross-border pension scheme.

Where a person comes to live in the UK from abroad, he or she may continue to contribute to an existing overseas pension arrangement and receive tax relief if certain conditions are met.

Benefits may be transferred into a UK pension scheme from any overseas arrangement; but benefits may only be transferred abroad from a UK scheme if the overseas scheme is a QROPS.

Transfers to a QROPS on and from 9 March 2017 are subject to a new charge to taxation of 25%, the OTC, unless certain exemptions apply (see further below).

An occupational pension scheme is not permitted to accept contributions from an employer in respect of an employee who is permanently employed to work abroad in another EEA state unless it is authorised by the Pensions Regulator to act as a "cross-border" pension scheme. A modified regulatory regime applies to cross-border schemes, which is particularly onerous where defined benefits are provided.

Irrespective of the statutory position, a scheme's own rules may impose restrictions on overseas membership.

Restrictions on tax relief

The Finance Act 2004 allows relief from UK income tax on an individual's contributions to a UK registered pension scheme if he or she is a "relevant UK individual" during a tax year. An individual will be a relevant UK individual for a tax year if he or she:

  • has relevant UK earnings chargeable to UK income tax for that year;
  • is tax resident in the UK at some time during that year;
  • was tax resident in the UK both at some time during the five tax years immediately before that year and when he or she became a member of the pension scheme; or
  • has, or his or her spouse or civil partner has, for that year general earnings from overseas Crown employment subject to UK tax.

In any tax year, a relevant UK individual can get tax relief on pension contributions of up to 100% of his UK earnings or a £40,000 annual allowance, whichever is the lower, (although in some circumstances a lower annual allowance is applied).

The employer's contributions enjoy tax relief provided that the "wholly and exclusively" test is met.

Restrictions on benefits and "international enhancement"

The Finance Act 2004 restricts the amount of benefits that may be accrued or provided under a registered pension scheme and the form in which those benefits may be taken. Those restrictions are the "price" that the member pays for the tax relief that he or she has benefited from. For further information see the "Pensions tax allowances for individuals" fact card. These restrictions are generally eased or disapplied where the member has not benefited from UK tax relief either because he or she has been a member of the scheme whilst a "relevant overseas individual" or a transfer has been made to the scheme from a "recognised overseas pension scheme". In particular, the member may gain an enhancement to his or her "lifetime allowance".

If a person is not a relevant UK individual (see above), he or she will be a "relevant overseas individual". Where a person is a relevant UK individual, he or she may nonetheless also be a relevant overseas individual but only in limited circumstances and for limited purposes.

Legislation permits a scheme to have separate rules for members who have not benefited from UK tax relief, under which it need not comply with the rules relating to authorised pensions and lump sums. This is seldom encountered in practice.

Transfers

A registered pension scheme may only make an overseas transfer to a scheme approved for the purpose by HMRC (known as a QROPS. A list of recognised overseas pension schemes is published on the HMRC website and regularly updated.

However, HMRC warns that the list is not exhaustive and that it will not be bound by it if it transpires that a scheme has been wrongly included (say, because of false information provided by the scheme manager). Generally, trustees are wise to exercise caution in making transfers to QROPS - clear communication with the member in particular is important, as is due diligence and especially given the recent introduction of a new tax charge on transfers to QROPS (explained below).

Unless certain exemptions apply, transfers to QROPS on and from 9 March 2017 are subject to a new charge to taxation of 25%, (the OTC), for which the scheme member and the scheme administrator are jointly and severally liable. QROPS cease being so on 14 April 2017 unless a revised undertaking is submitted to HMRC by 13 April 2017.

Transfers other than to QROPS are "unauthorised payments" and therefore subject to significant tax charges and penalties. A transfer into a registered pension scheme may be made from any type of overseas scheme, but it will only lead to an enhancement to the member's lifetime allowance if the scheme is what is called a "recognised overseas pension scheme" (ROPS) (broadly, an overseas pension scheme that is established in one of a prescribed list of countries and which complies with other prescribed conditions).

Persons migrating to the UK: migrant member relief and relief under double taxation treaties

If a person comes to the UK as an existing member of a qualifying overseas pension scheme, he or she may make contributions to that scheme and receive relief from UK income tax provided that certain conditions are met. This is known as "migrant member relief". The annual allowance and lifetime allowance apply in respect of contributions that have received migrant member relief. Where the relief is available, employer contributions will be tax deductible.

Alternatively, tax relief may be available under a double taxation treaty, depending on the country in which the scheme is established.

Occupational schemes: overseas employees and cross-border authorisation and approval

The Pensions Act 2004 prohibits trustees from accepting contributions from a "European employer" unless the scheme is authorised to act as a cross-border pension scheme and is also approved. Authorisation is "general" (in that it does not matter how many member states or employers are within the scheme). Approval is "specific" to each cross-border operation, so relates to specific employers in specific member states.

An employer will be a "European employer" if it employs and makes contributions in respect of a "qualifying person" (often termed a cross-border employee), namely:

"a person who is employed under a contract of service and whose place of work under that contract is sufficiently located in an EEA state other than the United Kingdom so that his relationship with his employer is subject to the social and labour law relevant to the field of occupational pension schemes of that EEA state, but, for the purposes of this definition, a seconded worker is not to be regarded as being so sufficiently located in an EEA state other than the United Kingdom".

The essential question is whether the nature of any member's employment means that the scheme has to comply with any other EU state's social and labour laws in respect of that member.

An employee who is engaged to work permanently abroad will generally be a cross-border employee for this purpose. The place of registration of the employer (if it is a company) is not relevant.

An employee who is seconded to work abroad will not be a cross-border employee. The Pensions Regulator (in its Guidance on Cross-border Schemes) says that the characteristics of a secondment are:

  • the employee being sent to work overseas from the UK;
  • the employee providing services on behalf of the UK employer;
  • the intention that this should be for a limited period; and
  • the expectation that the employee will either return to the UK or retire at the end of that period.

It is up to the trustees to determine whether any members of the scheme who work in EU member states other than the UK are seconded employees.

Where an occupational scheme includes an active member who is a cross-border employee, the scheme will either need to be authorised as a cross-border scheme or the member will have to leave pensionable service.

Scheme funding requirements

Authorisation as a cross-border scheme is not necessarily attractive, particularly where defined benefits are provided, as an onerous funding regime applies to cross-border defined benefit schemes.

Broadly, a defined benefit scheme applying for the first time to be authorised as a cross-border scheme must be "fully funded" at the date of that application (see regulations 4 and 7 of the Cross-border regulations). Indeed, the IORP stipulates in Article 16 that the scheme must be fully funded at all times.

Being "fully funded" means the scheme must meet statutory funding requirements, which in turn means the scheme has "sufficient and appropriate assets to cover the scheme's technical provisions" (broadly, the scheme has the necessary amount required to meet scheme liabilities, calculated actuarially). This could bring forward the date by which the scheme would otherwise have to be fully funded See the comment on IORP II below, as there is a view that the situation could be more nuanced than previously.

The position is slightly different for a newly established scheme, where a two year period to achieve full funding is possible (see regulations 6 and 7 of the Cross-border regulations).

The requirement for the scheme to be fully funded is over-arching. So all members must be considered and the scheme viewed as a whole, rather than just the liabilities for the cross-border employees.

According to the 2017 European Insurance and Occupational Pensions Authority (EIOPA) report on market developments in cross-border Institutions for Occupational Retirement Provision (IORPs), as at 1 March 2017 there were only 26 authorised cross-border schemes in the UK and only 90 in the EEA as a whole. Of the 90 EEA authorised schemes, just 79 were actively operating cross-border. The stringent requirements regarding scheme funding may be a factor in the low numbers.

Termination of pensionable service

As mentioned above, if the scheme is not authorised as a cross-border scheme, any cross-border employee must leave pensionable service. It is a vexed question whether it is sufficient to simply terminate pensionable service or whether the member's deferred benefits also need to be transferred away from the scheme. The Regulator's Guidance states (unhelpfully) that:

"Trustees and employers should be mindful of the position of all members, including deferred members and pensioners, when considering whether their scheme should be seeking authorisation and approval."

(A previous version of the Guidance indicated that benefits could be retained in respect of certain deferred members where pensionable service had ceased before a date in 2006.) The more cautious view is that deferred benefits should transfer away, so obviously contractual terms of employment will need to be considered.

Scheme rules

Subject to limited exceptions, a provision in the rules of an occupational pension scheme which has the effect of discriminating between members by reference to whether or not they are employed wholly or partly in the UK is not effective. This can make it challenging to terminate a cross-border member's pensionable service.

This provision does not apply to personal pension schemes and in fact personal pension scheme providers almost invariably only allow "relevant UK individuals" (see above) to join their arrangements.

IORP II

IORP II has now been finalised and agreed. This is a significant revision of the original IORP Directive. EU member states will have to implement the revised Directive in national legislation by 12 January 2019. IORP II introduces (amongst other things) a number of new requirements relating to scheme governance and member communications. The requirement for cross-border schemes to be fully funded at all times is retained in Article 15, although there is an implicit acknowledgement that cross-border schemes may not be fully funded at all times and in which case appropriate measures must be taken by the competent authority within the member state to ensure that members and beneficiaries are adequately protected.

How will Brexit affect this? The time period allowed for implementing IORP II and the two year period of agreeing withdrawal terms for Brexit will overlap, so the UK may be obliged to adopt the provisions of IORP II into domestic legislation (and indeed, this may be required as part of any agreement reached with the EU in the Brexit negotiations).

The Pensions Regulator's guidance on cross-border schemes

The Regulator's guidance on cross-border schemes is helpful.

For example, there are standard form letters for UK cross-border schemes to assist with reclaiming tax withheld in other member states. Note that automatic-enrolment may require some "UK" employees to be auto-enrolled into UK workplace pension saving, so thought as to whether the employee in question is truly cross-border or UK based is necessary from this regard too.

Foreign Pensions

The tax treatment of foreign pensions is to be more closely aligned with the UK's domestic tax regime, bringing foreign pensions and lump sums fully into tax for UK residents to the same extent as domestic ones from 6 April 2017. Specialist schemes for those employed abroad (section 615 schemes) are closed to new saving.

There is an extended right to tax recently emigrated non-UK residents' foreign lump sum payments from funds that have had UK tax relief, an alignment of the tax treatment of funds transferred between registered pension schemes and an updating of "eligibility criteria" for foreign schemes seeking to qualify as overseas pension schemes for tax purposes.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
14 Sep 2017, Seminar, Birmingham, UK

Has Cloud replaced traditional outsourcing models? We will compare cloud to outsourcing, consider whether they have effectively become the same thing for many solutions and assess some of the advantages and disadvantages of each model.

18 Sep 2017, Seminar, London, UK

Our annual event as part of the London Design Festival is now in its fifth year. We would be delighted if you are able to join us again.

21 Sep 2017, Seminar, London, UK

Has Cloud replaced traditional outsourcing models? We will compare cloud to outsourcing, consider whether they have effectively become the same thing for many solutions and assess some of the advantages and disadvantages of each model.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.