UK Pension Transfers to Australia
Some Background and History - QROPS
On April 6, 2006 a new pension transfer regime became applicable to transfers out of UK pension funds into foreign pension schemes. From that time onwards, in order to avoid very significant taxation, pension transfers out of the UK had to be made to funds certified as Qualifying Recognised Overseas Pension Schemes (QROPS).
In summary, the major changes introduced included:
- Transfers out of UK registered pension schemes being tested against a lifetime allowance (LTA) and any amounts transferred above this level being taxed at a rate of 25%.
- Transfers below the LTA did not attract tax charges as long as the receiving overseas scheme was a QROPS.
- Transfers to an overseas scheme which was not a QROPS would be treated as unauthorised payments and attract tax charges of 40%, or higher.
Following that announcement, a very large number of Australian superannuation funds applied for and received QROPS status, with HMRC maintaining a list of qualifying funds on its website. Self Managed Superannuation Funds (SMSF) in Australia were also able to receive QROPS certification and this increased the transferee's range of choice considerably. Apart from registration, QROPS funds need to meet very specific reporting requirements to HMRC for a period of 10 years (originally 5 years, but extended further in 2012) after the date of the last transfer from the UK.
In early April, 2015 the UK enacted a change to its pension regulations effectively prohibiting any access to a pension prior to age 55 unless for reasons of "serious ill health". They then contacted all QROPS funds worldwide and sought confirmation that they complied with this requirement. Australian superannuation funds do provide access to pension funds prior to age 55 in a very limited number of situations apart from ill health (severe financial hardship, DASP payments etc.,) and needed to change their Trust deeds to accommodate this change if they wished to continue as eligible QROPS.
The end result was that from 1 July 2015 only one Australian fund was initially listed as QROPS certified - the Local Government Superannuation Scheme (LGSS) in Queensland. In practice, from this time onwards direct transfers to Australia became limited to individuals aged 55 and above into self managed superannuation funds whose trust deeds met QROPS requirements - and one current qualifying retail QROPS fund. These restrictions meant that transfers might not be economically viable for smaller pension funds, and other strategies including direct withdrawal in the UK post age 55 could be simpler, more economic and flexible. Note also that the minimum age at which an individual can flexi-access UK pension money, and also when it is possible to transfer to Australian superannuation, will increase from age 55 to age 57 from April, 6 2028.
None of these changes require expatriates to transfer their pension; you may continue to leave it in the UK and eventually receive a sterling pension. Whether this is the correct approach from a tax and personal perspective should be subject to balanced, professional advice.
The area of most difficulty is in the area of “final salary” or “defined benefit” schemes - where pensions are based on the member’s salary and length of service. The "transfer values" out of these funds are essentially the present day cash value of deferred retirement income promises made by employers. They depend very much on assumptions made regarding investment returns by the fund.
This, and the fact that pensions are usually indexed in some fashion, has to be balanced out against the benefits of transfer into an Australian superannuation, and most particularly the tax benefits. It is recommended that you obtain professional advice on these matters and it is now a legal requirement that professional advice is obtained in the UK before a transfer out of a defined benefit scheme (above a certain value) is available.
Introduction of the Overseas Transfer Charge (OTC)
HMRC announced that the introduction of a 25% overseas tax charge (OTC) with effect from March 9, 2017. The OTC applies if none of the following conditions apply:
- the member is resident in the same country in which the QROPS receiving the transfer is established
- the member is resident in a country within the European Economic Area (EEA) and the QROPS is established in a country within the EEA
- the QROPS is set up by an international organisation for the purpose of providing benefits for or in respect of past service as an employee of the organisation and the member is an employee of that international organisation.
- the QROPS is an overseas public service pension scheme and the member is an employee of an employer that participates in the scheme
- the QROPS is an occupational pension scheme and the member is an employee of a sponsoring employee under the scheme
A literal reading of these conditions suggests that direct pension transfers to Australia can continue to occur - into the QROPS funds of members aged 55 plus - but indirect transfers from the UK into funds outside of Australia - such as to New Zealand, Malta or Gibraltar, which have been promoted by a number of advisers - will attract the OTC. However, this is a complex area which requires specific advice.
NOTE: The UK Government announced the abolition of the Lifetime Allowance Charge (LTC) from 6 April 2023. This was a 25% tax on the amount over the pension member's Lifetime Allowance levied on transfer to an Australian QROPS. This only impacted individuals who had large UK pension fundss over the applicable protected LTC, but the abolition of the LTC made some transfers more economic and simplified transfer planning.Unexpectedly, the UK Government announced in November, 2023 an intention to effectively restore the position before the abolition of the Lifetime Allowance Charge by applying an "overseas transfer allowance" equal to a person's current Lifetime Allowance. This will mean that, in as much as the total amounts transferred to a QROPS exceed the overseas transfer allowance of £1,073,100 (or a higher amount for those with protection), the excess will be taxed at 25%.
Australian Tax on the Pension Transfer
Ordinarily, the bulk or entirety of pension funds transferred from a UK pension fund to an Australian superannuation fund will be regarded as a non-concessional contribution and the fund receiving the transfer will not be liable to taxation.
However, if the pension sum transferred has increased in value since you commenced Australian tax residency - unless the transfer was completed within 6 months of your becoming an Australian tax resident - there will be a taxable element of the transfer referred to as the "applicable fund earnings" or AFE. In terms of this element, you may elect to have it taxed within the super fund at 15% or, should you do nothing, it will be taxed at your marginal rate of tax. If you make an election to be taxed within the fund, the amount will not count towards your non-concessional contribution cap.
This can be a complex, nuanced area and specific tax advice is recommended to ensure that any transfer is made tax effectively.
Should you wish to make an inquiry about the transfer of a pension from the UK or elsewhere to Australia, or are seeking professional advice in a related matter, please complete the Inquiry form at the bottom of this page. No cost or commitment attaches to any discussion and you would be provided with a fee quotation in advance of any advice or services being rendered.