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Changes to Pension Transfer Rules
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| Author: |
Alan Collett |
| Date: |
Friday, February 24, 2006 |
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A new "simplified" system of pension arrangements applies in the UK from what is being called "A" Day - the 6th of April, 2006. These changes are likely to affect anyone who is a member of a UK pension scheme, and will also impact on any individual who has UK pension arrangements and who wants to transfer the same into an "overseas pension scheme".
Leaving aside the issue of the amounts that can be paid into a UK pension scheme under the new rules (interested persons can read up on the subject here), the following points should be noted by all migrants who have UK pension scheme interests:
- A person who departs the UK can retain his or her UK pension arrangements so long as the pension scheme's rules allow: in a tax context there are no residence restrictions on members of UK registered pension schemes
- As an alternative to retaining pension fund monies in the UK, an individual can transfer the UK fund to a scheme that is managed outside the UK. In the case of a migrant to Australia one would usually consider transferring the fund to a complying superannuation fund that is managed in Australia, to avoid the tax consequences of retaining fund monies outside Australia (see also below).
- In the new UK tax regime transfers out of a UK registered pension scheme will be measured against what is called the Lifetime Allowance (or LTA). Any amounts transferred above the LTA will be subject to a tax charge of 25%.
- The LTA is being initially set at £1.5 million for UK tax year 2006/07, rising to £1.8m in 2010/11.
- Transfers below the LTA will NOT attract a tax charge so long as the overseas scheme that receives monies from the UK fund is a Qualifying Recognised Overseas Pension Scheme (a "QROPS").
- A transfer to an overseas scheme that is not a QROPS is an "unauthorised member payment" and will give rise to a tax charge on the member of the scheme of an amount equal to 40% of the payment made from the UK scheme
- For an overseas pension or superannuation fund to be approved as a QROPS it will be required to provide details of the fund to HM Revenue in the UK, and to give undertakings, including agreeing to provide details of all payments to a scheme member, plus details of the member's address
Notes
1. It remains to be seen whether pension funds outside the UK will be agreeable to setting up administrative procedures that will enable them to adhere to their reporting obligations as a QROPS. This will probably be a commercial decision taken by a limited number of pension funds, and at the time of writing the author is not aware of any superannuation funds in Australia that have applied to become recognised by the UK Revenue. In any event, it seems likely that these changes will limit the choices available to UK migrants who have moved to Australia, which is thought to be a step that is not in the best interests of those emigrating the UK.
2. Those who become tax residents of Australia and who retain pension fund interests outside the UK can find themselves subject to a hostile tax environment in which they are required to include in their personal assessable income the annual growth in the value of their interests in pension funds that are located outside Australia.
Furthermore a tax charge can arise if:
i. A transfer of an overseas pension fund into an Australian superannuation fund takes place more than 6 months after becoming a tax resident of Australia, and/or
ii. A lump sum is received by the Australian tax resident individual at retirement age, as is often an option with UK pension funds - such lump sums are usually considered to be tax free in the UK, but can give rise to a tax charge in Australia.
It should also be noted that the combination of the new UK Revenue rules, the current absence of any QROPS within Australia, and the adverse tax legislation in Australia in relation to overseas pension fund interests may cause significant problems for migrants to Australia. More details in relation to these very important changes will be posted on Go Matilda News when they become known.
In the meantime, migrants who would like to have their personal tax position reviewed should complete the details here.
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