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Overseas transfers

The world is now very accessible, so increasing numbers of people are travelling and considering relocating for either work or in retirement. As a result, individuals who move overseas may want to take their UK pension benefits with them, rather than leaving them in the UK. Similarly, people coming to the UK may want to bring their overseas pension benefits with them. So it's important to understand what impact this may have on a receiving UK pension scheme.

Transferring UK pension benefits overseas

It's possible, in theory at least, to transfer pension benefits from a UK registered pension scheme to an overseas pension scheme. However, pension scheme trustees and providers won't always give every transfer option that the law allows.

Criteria and process to transfer benefits overseas

Transfers to an overseas pension scheme will be an unauthorised payment (and subject to the relevant tax charges) unless the receiving scheme is a qualifying recognised overseas pension scheme (QROPS). So it's crucial to establish the status of the receiving pension scheme.

Also, for transfers to QROPS requested after 8 March 2017, an overseas transfer charge will apply unless at least one of a specified list of exclusions applies.

It's also important to establish whether the tax authorities in the overseas territory will apply any local tax charges on transfers from UK pension schemes.

Information that UK pension administrators need to transfer benefits overseas

When an overseas transfer request is made, the scheme administrator must, within 30 days, ask the member to provide specific details and acknowledgements.

The member can provide this information (including confirmation that they acknowledge that tax charges might apply) on form APSS263 or in some other written format. This should be provided within 60 days of the transfer request.

Once they've received this, the scheme administrator should check that the overseas scheme meets the conditions to be a QROPS. This should be done no more than the day before the transfer is to be made. If it doesn't qualify as a QROPS, they'll be liable to a scheme sanction charge if the transfer goes ahead, as it would be an unauthorised payment.

As a QROPS transfer is a benefit crystallisation event, the administrator must carry out a lifetime allowance (LTA) test and pay any LTA tax charge that might be due. However, there will be no LTA charges in the 2023/24 tax year and the intention is that the LTA will be abolished from 6 April 2024.  

Despite this, LTA testing remains relevant – for example, for calculating the tax free cash entitlement of any other UK pensions the individual may have, or for the taxation of certain lump sum payments.

In addition to any LTA testing, the administrator must also assess, and deal with, any liability for the overseas transfer charge.

The scheme administrator has a requirement to give details of the transfer to HMRC, the member and the QROPS scheme manager:

• HMRC: Send form APSS262 to HMRC within 60 days. Any overseas transfer charge (or historical LTA tax charge) liability will be reported and paid using the quarterly Accounting For Tax (AFT) process. If the overseas scheme is not a QROPS, the transfer should instead be reported as an unauthorised payment.
• Member: Send details of the transfer, including any overseas transfer charge incurred, to the member within 90 days. Where no charge was applied, details of the relevant exclusion condition should also be given.
• Overseas scheme manager: Confirm if the transfer was subject to an overseas transfer charge, and any relevant deduction, to the scheme manager within 31 days. If the transfer was excluded from the charge, the reason for this must also be given.

Qualifying recognised overseas pension schemes (QROPS)

A QROPS is a type of overseas pension scheme to which someone can transfer funds from a UK registered pension scheme without incurring unauthorised payment charges.

The purpose of QROPS, when introduced back in 2006, was to allow individuals moving overseas to be able to take their pension with them. But following years of the rules being manipulated and misused, the Government announced measures in the Spring Budget 2017 which were specifically designed to return the use of QROPS back to what was originally intended.

A UK pension provider must carry out checks on an overseas scheme to clarify that it's a QROPS, rather than just a ROPS, before allowing a member to transfer their funds. In addition, providers now have the extra responsibility for identifying if the overseas transfer charge applies. Where the transfer creates a liability, the provider must adhere to the new administrative requirements associated with this charge.

HMRC require QROPS to provide benefits broadly similar to a UK registered pension scheme.

Requirements to qualify as a QROPS

Firstly, an overseas pension scheme is a recognised overseas pension scheme (ROPS) if it's set up, and regulated and/or recognised for tax purposes, in:

• a member state of the European Economic Area, Norway, Iceland or Liechtenstein, or
• a country or territory (other than New Zealand) with which the UK has a double taxation agreement containing exchange of information and non-discrimination provisions, or
• any other country or territory (including New Zealand) if the scheme rules dictate that:
  
  
  • retirement benefits can't be paid earlier than would be allowed under a UK registered pension scheme, and
  • residents of the country (or territory) can join the scheme.
  and
• if tax relief in respect of benefits paid from the overseas scheme is available to members who aren't resident in the country or territory in which the scheme is set up, the same (or largely the same) tax relief has to:
  
  
  • also be available to any members who are resident in the country or territory, and
  • apply regardless of whether the member was resident in the country or territory when they joined the scheme or during any period of membership.

A ROPS can become a QROPS if the scheme manager gives HMRC certain assurances, including that the minimum pension age for the scheme is age 55.

The scheme manager must:

• re-notify HMRC generally every 5 years that the scheme is a recognised overseas pension scheme (and supply any evidence required to prove this),
• tell HMRC the name of the country or territory that the scheme is set up in, and
• agree to comply with necessary administrative and reporting requirements - including those relating to the new overseas transfer charge.

While HMRC can refuse to recognise the QROPS, where QROPS status is granted, they will give the scheme a unique reference number. HMRC produces a list of current ROPS each month, but this only includes overseas schemes that have agreed to have their details published.

Further information on QROPS is available in the Pensions Tax manual.

Reporting responsibilities by QROPS scheme to HMRC

Once an overseas pension scheme has been designated QROPS status, the scheme manager must tell HMRC about:

• any payments or transfers made to or in respect of a scheme member where the original transfer from the UK took place before 6 April 2017:
  
  
  • and the payment is being made within 10 years of the original transfer from the UK, or
  • the member is UK resident in the tax year of the payment or has been UK resident in any of the previous 5 tax years
    
• any payments or transfers made to or in respect of a scheme member where the original transfer from the UK took place after 5 April 2017:
  
  
  • and the payment being made is within 10 years of the original transfer from the UK, or
  • the member is UK resident in the tax year of the payment or has been UK resident in any of the previous 10 tax years

Note: Both of these payment types must be reported on form APSS253 within 90 days of the payment being made. The scheme still has this responsibility even if it ceases to be a QROPS.

• any overseas transfer charge liability
  Where a liability to the overseas transfer charge is created, the scheme manager must notify HMRC within 90 days. Once notified, HMRC will issue an accounting reference number and bank details to the scheme manager for payment of the charge. Payment must be made within 90 days of these details being issued. Failure to pay within this deadline will incur late payment interest (and potentially could result in loss of QROPS status).
• information changes
  This can be any change to the scheme or a realisation that inaccurate information had previously been supplied to HMRC. It must be provided on form APSS251A without delay.
• the scheme losing its QROPS status
  This must be reported on form APSS251B within 30 days of ceasing to be a QROPS and must give the reason why the scheme is no longer a QROPS. Details must also be given of members with funds which had been transferred in from UK registered pension schemes, together with the value of the members' funds at the cessation date.

As well as this mandatory reporting, a QROPS may be asked by HMRC to give:

• details of the company managing the QROPS, and its directors' names and addresses, in a time specified by HMRC, and/or
• details of any transfers of UK registered pension funds made into the QROPS (either directly or via another QROPS) within 90 days.

Overseas transfer charge

This is a tax charge which applies to non-excluded transfers from UK relieved pension schemes to QROPS requested after 8 March 2017.

It was introduced due to HMRC's increased concern over the numbers of savers getting tax relief in the UK then transferring to a QROPS to secure tax advantages when taking benefits. They were also concerned overseas transfers were being used by pension scammers and pension liberation schemes - as many of these schemes operate in jurisdictions where there's much less regulation than the UK and where high charges and unregulated investment funds are commonplace.

A charge of 25% of the 'transferred value' applies to both 'original' transfers (i.e. the initial transfer from the UK to the QROPS) and 'onward' transfers (i.e. from QROPS schemes). The 'transferred value' makes an allowance for any LTA charge that may also apply.

Excluded transfers: QROPS transfer requests made after 8 March 2017 will only be excluded from the charge if, at the point of transfer, they meet at least one of these conditions:

• The member resides in the same country or territory as the QROPS is established
• The QROPS's territory of establishment is within the EEA or Gibraltar and the member is UK resident, or resident in a country within the EEA or Gibraltar.
• The QROPS is an occupational scheme or an overseas public service pension scheme, with the member joining as an employee
• The QROPS is set up by an international organisation, to provide benefits for current or former employees of that organisation

Transfers requested before 9 March 2017 are automatically excluded from the charge - provided the transfer is made to the originally requested receiving scheme. This excluded status will continue to apply to the 'ring-fenced funds' on onward transfers.

The overseas transfer charge can also apply at a later date if the circumstances which made the transfer excluded cease to apply within the relevant period. Where a liability is created by a subsequent event, the charge will be based on the 'ring-fenced' fund value at the date of that subsequent event.

The relevant period: This is the time period, following an original transfer, where the transfer charge may still apply - for example, if the member transferred their benefits to a country outside the EEA. This period is at least 5 years from the date of the original transfer, with the specific length dependant on the date of the transfer:

• Transfers made on 6 April - the relevant period is 5 tax years from date of transfer.
• Transfers not made on 6 April - the relevant period is the remainder of the transfer tax year plus the following 5 tax years.

An onward transfer, made within the relevant period, will not be subject to the charge if either:

• the transfer continues to meet one of the exclusions or
• an overseas transfer charge was previously deducted, in respect of the transferring 'ring-fenced' funds.

The overseas transfer charge will not apply to onward transfers made after the end of the relevant period.

Liability for the overseas transfer charge

This depends on the stage at which the charge arises:

• Initial transfer: Where the charge arises on the initial transfer, the member and the transferring scheme administrator are 'jointly and severally liable'.
• Later events: If a later event creates a charge, the obligation passes to the scheme holding the 'ring-fenced' funds at that time, along with the member.

For further information, GOV.UK has guidance on the overseas transfer charge.

Lifetime allowance impact

A transfer from a UK registered pension scheme to a QROPS is a benefit crystallisation event (BCE8) for LTA purposes. This means the amount transferred will be tested against, and will use up some (or possibly all) of the individual's LTA.

If the transfer was before 6 April 2023 and  the available LTA was exceeded, an LTA tax charge of 25% applied to the excess. For transfers on or after 6 April 2023, the LTA tax charge will no longer apply. 

Despite the LTA tax charge no longer applying, LTA testing will continue - at least for tax year 2023/24.

Unlike transfers between UK registered pension schemes, a LTA test applies even if the transfer represents crystallised rights to existing pensions in payment that have already been tested against the LTA. However, the crystallised value placed on the benefits being transferred is reduced by the amount originally tested when the benefits came into payment.

The one exception to this general rule is where the transfer represents pensions, including income drawdown pensions, which were already in payment before 6 April 2006. These rights aren't tested on transfer to a QROPS.

Interaction between the LTA charge and the overseas transfer charge

The LTA charge and oversea transfer charge each create their own separate tax liability and some QROPS transfers before 6 April 2023 could  have qualified for both charges. However, the rules were written to avoid a double deduction.

Where a transfer to a QROPS gave rise to a LTA tax charge, it was deducted from the fund before the calculation of any overseas transfer charge. The value of the post LTA charge fund was known as the 'transferred value', and was this value that was used to calculate the overseas transfer charge.

Transferring overseas pension benefits to the UK

Pension transfers to UK registered pension schemes are possible, in theory, from almost any overseas pension scheme. These transfers are not recognised pension transfers, but they're treated in a similar way.

While UK law allows this, pension schemes and products won't always give every possible transfer option. Also, the tax authorities in some countries or regions may not allow transfers to the UK (or, at least, not without tax penalties).

Recognised overseas pension schemes (ROPS)

These are non-UK pension schemes set up and regulated and/or recognised for tax purposes, in:

• a member state of the European Economic Area, Norway, Iceland or Liechtenstein or
• a country or territory (other than New Zealand) with which the UK has a double taxation agreement* containing exchange of information and non-discrimination provisions, or New Zealand (but only if it's a KiwiSaver scheme) or
• any other country or territory (including New Zealand) if the scheme rules dictate that:
  
  
  • at least 70% of the funds must be used to provide a pension income on retirement for life, and
  • retirement benefits can't be paid earlier than would be allowed under a UK registered pension scheme, and
  • residents of the country (or territory) can join the scheme.

and

• if tax relief in respect of benefits paid from the overseas scheme is available to members who aren't resident in the country or territory in which the scheme is set up, the same (or largely the same) tax relief has to:
  
  
  • also be available to any members who are resident in the country or territory; and
  • apply regardless of whether the member was resident in the country or territory when they joined the scheme or during any period of membership.

* High-level details of double taxation agreements are available on HMRC's website.

HMRC produces a list of current ROPS each month, but this only includes overseas schemes that have agreed to have their details published.

Annual allowance & lifetime allowance impact

Annual allowance

Transfers of pension benefits into a UK registered scheme from overseas do not count towards the individual's annual allowance.

For members of a UK Defined Benefit scheme, the overseas transfer value is subtracted from the closing value when calculating the scheme's Pension Input Amount. This ensures the extra benefit accrued from the overseas transfer doesn't count against the annual allowance.

Lifetime allowance

Overseas benefits transferred into a UK registered scheme will be tested against the LTA in the usual way when the benefits are crystallised.

But the member can normally claim an increased LTA from HMRC if the transfer is made from a ROPS. The addition to the person's standard LTA, based on the amount transferred, is known as a lifetime allowance enhancement factor.

Despite tax charges no longer applying and LTA enhancement factors not providing any additional tax free cash entitlement, there can still be value in applying for the enhancement as it can give a higher allowance for certain lump sum payments that could be subject to income tax.

A claim for a LTA enhancement factor must be made within five years of 31 January following the tax year in which the transfer was made, using HMRC form APSS 202.

Note: No LTA increase can be claimed for:

• any part of the transferred fund that originated from contributions made to an overseas scheme after 5 April 2006 which received UK tax relief or
• transfers from overseas pension schemes that aren't recognised overseas pension schemes.

Lifetime allowance enhancement factor:

Calculating the factor: Where an individual is entitled to an increase to the standard LTA, the uplift is calculated by dividing the value of the extra benefits by the standard LTA in force when the event that created the right to the higher allowance happened.

But if the individual has one of the following transitional protections at that time then, rather than the standard LTA, they would use:

• £1.8M if they had fixed protection 2012 (FP2012)
• £1.5M if they had fixed protection 2014 (FP2014)
• £1.25M if they had fixed protection 2016 (FP2016);
• their personal LTA if they had individual protection 2014 (IP2014) or individual protection 2016 (IP2016).

The answer is rounded up to two decimal places.

Applying the factor: The way the LTA enhancement factor (as a result of a transfer from a ROPS) is applied to calculate someone's increased LTA depends on when the event that awarded the enhancement occurred.

• If the event happened between 6 April 2006 and 5 April 2012, the increase to the individual's LTA is calculated by multiplying an underpinned LTA of £1.8M (or the standard LTA if greater) by their enhancement factor
• If the event happened between 6 April 2012 and 5 April 2014, the increase to the individual's LTA is calculated by multiplying an underpinned LTA of £1.5M (or the standard LTA if higher, or £1.8M if FP2012 applies) by their enhancement factor
• If the event happened between 6 April 2014 and 5 April 2016, the increase to the individual's LTA is calculated by multiplying an underpinned LTA of £1.25M (or the standard LTA if higher, or £1.8M if FP2012 applies, £1.5M if FP2014 applies or their personal LTA under IP2014) by their enhancement factor
• For events after 5 April 2016, it's calculated by multiplying the standard LTA in force when the benefit crystallisation event takes place (or if higher, £1.8M if FP2012 applies, £1.5M if FP2014 applies, £1.25M if FP2016 applies or their personal LTA under either IP2014 or IP2016) by their enhancement factor.

In all cases, this extra allowance is added to the standard LTA (or, if higher, the protected LTA under either fixed or individual protection) to calculate the individual's LTA.

It should be noted however, that the enhancement does not give any additional entitlement to tax free cash.