Techzone

Has HMRC’s latest clampdown on overseas pension transfers completed the job started with 2015’s pension freedoms, positioning modern DC pensions as the natural vehicle for UK retirees seeking more flexibility? It certainly looks that way.

The new 25% tax charge on ‘exotic’ overseas transfers should refocus the use of QROPS to what was originally intended, i.e., a ‘vanilla’ option allowing savers retiring abroad to take their pension with them to their new country of residence.

Transfers to exotic third party jurisdictions to secure unintended tax advantages should largely be consigned to the history book. Many UK pension savers moving abroad may now be better off leaving their pension here and taking advantage of the UK pension freedoms. And it’s another body blow for pension scammers.

What is a QROPS?

The Qualifying Recognised Overseas Pension Schemes (QROPS) rules allow funds accumulated in the UK to be transferred to an overseas pension scheme provided the receiving pension scheme meets certain criteria on how benefits are taken and agree to reporting requirements to HMRC.

They were introduced to allow internationally mobile workers and those seeking to retire abroad to take their pension savings with them when they left the UK. But since they were introduced, there has been a growth in QROPS established in tax havens that the scheme member never sets foot in. In some cases QROPS have been marketed to those who have no intention of leaving the UK.

HMRC has become increasingly concerned about the numbers of savers obtaining tax relief in the UK and transferring to QROPS to secure tax advantages when taking benefits. And there are further concerns that overseas transfers have been used by pension scammers and pension liberation schemes. Many of these schemes operate in jurisdictions where there is much less regulation than the UK and where high charges and unregulated investment funds are commonplace.

These factors prompted the introduction of a charge on certain transfers.

What's changed and why?

UK pension providers must deduct 25% tax from QROPS transfers requested after 8 March 2017 which do not meet HMRC’s new criteria. The only overseas transferees to escape the charge will be those transferring;

• to their employer’s occupational pension scheme; or
• to their country of residence; or
• within the EEA.

This maintains penalty-free movement of tax-relieved UK pension funds overseas in the circumstances originally envisaged. But the tax clampdown will hit those moving their pension to ‘third party’ jurisdictions to avoid UK tax.

Anyone whose status changes within 5 years of a transfer, such that they fall outside the penalty-free categories, faces a tax charge after the event. And receiving schemes have to give an undertaking to HMRC that they will deduct the 25% charge and pay it to HMRC.

This reduces the scope for ‘jurisdiction hopping’, i.e., taking up temporary residence in a country simply to avoid the charge on the transfer before taking up permanent residence elsewhere or seeking to make successive transfers. It will also have an impact on the number of overseas schemes willing and able to accept UK transfers.

Anyone leaving the UK now has to think seriously before moving their UK pension overseas rather than leaving it here.

Transferring abroad

Those looking to take their pension with them have a number of things to consider before commencing the transfer process. It may not be as easy as you think.

Even if the transfer is for one of the permitted purposes, the receiving overseas scheme still has to be on HMRCs list of Recognised Overseas Pension Schemes.

Any overseas transfer to a scheme which isn’t a QROPS will be an unauthorised payment, subject to the related tax charges. This may greatly limit options, as UK schemes will not normally agree to a non-QROPS overseas transfer as it also raises the spectre of scheme sanction charges and possible deregistration.

With HMRC continually looking to clampdown on the misuse of QROPS, the number of available schemes has fallen dramatically in recent years. So it's important to check the options available in the country your client plans to move to. Popular retirement destinations such as Spain and Portugal currently have two and four schemes listed respectively. And there are no US schemes for anyone looking to go and work in the States.

The burden of HMRC’s new reporting and tax collecting criteria could yet see the number of available overseas schemes fall even further. 

Leave it here

Even before the new tax charge, the introduction of DC pension freedom had removed much of the appeal of moving UK pensions overseas. The UK now has extremely flexible pension income and benefit options. Post 55 there is unrestricted access to pension savings. And with modern flexible contracts, such as SIPPs, unused pension funds can be passed down to future generations tax efficiently.

These freedoms have addressed two of the main reasons why previously many of those moving overseas had turned to QROPS – to be free of compulsory annuity purchase or GAD income drawdown limits and the 55% ‘death tax’. 

The ability for UK pension income to be paid directly to someone living abroad in their local currency, or to a UK bank account in sterling allowing clients to choose when to transfer the money overseas (for example, when the exchange rate is favourable), brings another attraction to keeping the funds in the UK for some.

Non-UK residents may still have to pay UK income tax on pension income from a pension in the UK. But the UK has Double Taxation Agreements with many countries. These generally ensure that tax isn’t payable both in the UK and wherever someone has taken up residence. The terms of each agreement will set out which country has primary tax rights and how relief for any tax already deducted can be claimed.

Summary

The introduction of the new overseas pension tax charge should mean that clients moving abroad are less likely to be drawn in by unregulated ‘salesmen’ looking to push QROPS as an option for their UK pension savings. Advice on whether to take it with them or leave it here in the UK will more often be taken by qualified financial advisers here in the UK who will put their client’s interests first. And, for many clients, the conclusion may increasingly be that keeping it in the UK is the right answer.