UK Pension Transfer

HMRC rules on transfers to and from overseas pension schemes were reformed from 5 April 2006.

Summary

A transfer to an overseas scheme is only a recognised transfer (and hence, an authorised payment) if it is made to a qualifying recognised overseas pension scheme. A transfer made to any other type of overseas scheme is an unauthorised member payment.

What is a qualifying recognised overseas pension scheme?

A transfer out may only be made to a qualifying recognised overseas pension scheme; otherwise it is an unauthorised payment. A recognised overseas pension scheme is a qualifying recognised overseas pension scheme if the overseas scheme manager provides all the following to Audit & Pension Schemes Services, HM Revenue & Customs, Yorke House, Castle Meadow Road, Nottingham NG2 1BG, on form PS251:

•Notification that it is a recognised overseas scheme and where it is established, with any evidence that HMRC may require. If the scheme is not established in another EU member state, Norway, Iceland or Lichtenstein or in a country with a double taxation agreement with the UK, the scheme manager must provide evidence that the scheme meets other requirements.

•Undertaking that they will inform HMRC if the scheme ceases to be a recognised overseas pension scheme.

•Undertaking that the scheme will comply with any requirements prescribed in regulations. This is to provide HMRC with details of certain payments from the scheme.

HMRC have advised that they will build up a register of qualifying recognised overseas pension schemes, so that in future it will be possible to check with them if the scheme meets the criteria. When writing to APSS for confirmation that the scheme is a QROPS, the name of the actual scheme to which the transfer will be made is needed. It will not be possible for confirmation to be given using a company name.

The scheme manager may appeal against the decision to exclude a recognised overseas pension scheme from being a qualifying recognised overseas pension scheme. The scheme administrator must report the transfer to HMRC.

Effect of the transfer on the lifetime allowance

The transfer value is tested against the individual’s personal lifetime allowance before the transfer is made because it is a Benefit Crystallisation Event. This means that if the individual has used their personal lifetime allowance, there will be a 25% lifetime allowance tax charge on the part of the transfer value that takes them over their allowance. (The 55% tax charge only applies to excess lump sum benefits paid on death or retirement).

Effect of the transfer on the annual allowance

There is no effect on the member’s annual allowance. But the annual allowance applies up until the date of transfer. This means contributions (under a money purchase scheme) and increases in rights to benefits (under a defined benefit or cash balance scheme) up to the date of transfer still count towards the member’s annual allowance.

Transfers to overseas schemes that are not qualifying recognised overseas pension schemes.

Such transfers are unauthorised payments. This means the following tax charges will be payable:

•The member will suffer an unauthorised member payment tax charge of 40% of the transfer value.

•The scheme will suffer a scheme sanction charge of 15% of the transfer value.

•If the transfer value, together with any other unauthorised member payments for the member in a 12-month period amount to more than 25% of the member’s fund, the member will suffer a further 15% unauthorised payments tax charge.

•If the transfer value represents more than 25% of the scheme funds, the scheme could be de-registered and face a 40% de-registration charge. The scheme administrator must report the transfer to HMRC as an unauthorised payment.

Effect of the transfer on the lifetime and annual allowances

As the transfer is taxed as an unauthorised payment, there is no effect on the member’s personal lifetime allowance. The transfer is not a Benefit Crystallisation Event. There is no effect on the member’s annual allowance.

Special considerations when transferring to Australia or the USA

USA

The USA is not currently accepting transfers from UK registered pension schemes into 401K or other types of pension plans. However, a Double Taxation Agreement does exist, so that seconded employees can remain in their home country’s pension scheme without suffering double taxation.

Australia

An individual who emigrates to Australia may suffer a tax charge on the growth on their UK pension fund between becoming Australian resident and taking their benefits. A tax charge also arises if the funds are transferred to Australia unless the transfer is made within six months of becoming Australian resident.

A transfer in may be received from any type of overseas scheme but an increase is only given to a member’s personal lifetime allowance if it is from a recognised overseas pension scheme.

What is a recognised overseas pension scheme?

An overseas pension scheme is defined as a scheme where all the following apply:

•It is not a registered pension scheme.

•It is established outside the UK.

•It is regulated and/or recognised for tax purposes in the country in which it is established.

A regulated scheme is one that is subject to supervision by the national authorities that are responsible for ensuring that pension schemes are administered soundly in order to protect members’ interests. A scheme is recognised for tax purposes if it is approved or recognised by, or registered with, the relevant tax authorities as a pension scheme in the country or territory in which it is established and either the benefits or the contributions are taxed. It must be open to residents in the country in which it is established.

A recognised overseas pension scheme is an overseas pension scheme where one of the following applies:

•It is established in an EU member state or in Norway, Iceland or Liechtenstein.

•It is established in a country or territory with which the UK has a Double Taxation Agreement. These countries are listed on page 14101045 of the Registered Pension Schemes Manual. There is more information on the provisions of particular Double Taxation Agreements in the Double Taxation Relief Manual on the HMRC website. At the time of writing, some Double Taxation Agreements are under review so please check the latest position with HMRC.

•If it is established elsewhere, the scheme rules say at least 70% of the sums transferred will provide an income for life no earlier than Normal Minimum Pension Age (NMPA) i.e. 50 until 5 April 2010 and 55 from 6 April 2010. They must say that benefits cannot be paid earlier than would be allowed under a UK registered pension scheme (in other words, they can only be paid earlier than NMPA on ill health). In addition, they must state that residents in the country (or territory) can join the scheme.

Transfers in from recognised overseas pension schemes

Special treatment applies to transfers received from a recognised overseas pension scheme, in that the member may claim an increase to their personal lifetime allowance (an ‘enhanced lifetime allowance’). The overseas scheme does not have to meet the requirements of a qualifying recognised overseas pension scheme.

Effect of the transfer on the lifetime allowance

The Registered Pension Schemes Manual states that an increased personal lifetime allowance may be claimed because “no UK tax relief has been received, so it would be unfair if the transferred amount were to use up the member’s available lifetime allowance”. The member must claim this enhancement no later than five years after 31 January following the tax year in which the transfer is made, and register the amount with HMRC. Schemes receiving the transfer are not required to be part of this process since there is no requirement for members to notify schemes of an enhanced lifetime allowance or for schemes to keep records of members with an enhanced lifetime allowance. However, schemes will need to collect details of this and any other type of enhanced lifetime allowance when benefits are paid out.

Effect of the transfer on the annual allowance

Transfers in from other overseas schemes

The tax legislation is silent on the treatment of transfers from overseas schemes that are not recognised overseas pension schemes. However, page 14104010 of the Registered Pension Schemes Manual explains that such transfers are allowed and any investment income or gain in relation to the funds in the receiving scheme is free of income tax and capital gains tax.

Effect of the transfer on the lifetime allowance

When the member takes their benefits, there will be a Benefit Crystallisation Event at that point, and the benefits will be tested against the member’s personal lifetime allowance in the normal way. No increase is given to the member’s lifetime allowance.

Effect of the transfer on the annual allowance

The transfer does not affect the member’s annual allowance. Under a money purchase scheme the transfer value is not a contribution and so does not count towards the member’s annual allowance. Under a defined benefit or cash balance scheme, the benefit increase does not count towards the member’s annual allowance. Reciprocal agreements The reciprocal agreements on transfers with the Republic of Ireland, Jersey, Guernsey and the Isle of Man ended on A-Day. Overseas transfers to those four countries will not be subject to HMRC discretion. They will be treated in the same way as other overseas transfers.

This summary is written solely for the benefit of professional advisers and should not be treated or relied upon as a statement of law (or proposed law) and proper legal or tax advice should be sought on any particular aspect.