If you are living in Australia and planning to retire soon, it’s likely that the bulk of your retirement income will come from your accrued pension funds.
You are probably contributing to a superannuation scheme – either through your employer or your own discretionary arrangement.
Additionally, if you’ve spent time living and working in the UK, you will probably also have retained pension funds there. This will clearly raise the issue of you finding the best way to access these funds, especially if your long-term plan is to spend your retirement years here in Australia.
If you have done your own research on this issue, you may well have come across references to a “Qualifying Recognised Overseas Pension Scheme” (QROPS).
In this article, you can discover what a QROPS is, how it works, and some of the key considerations you need to bear in mind if you plan to use one in order to transfer your accrued UK pension funds to an Australian arrangement.
1. A QROPS is authorised by HMRC to accept UK pension funds
If you retire in Australia and leave your pension assets in the UK, any money you draw, apart from the 25% tax-free amount, will generally be taxed as income.
You will also face issues around currency risk and be at the mercy of fluctuating exchange rates.
A potentially more tax-efficient option is to transfer your UK pension to a QROPS in Australia.
As the name suggests, this is a scheme that is regulated by HMRC and authorised to accept transfers from UK pension schemes.
However, it’s important to bear in mind that there are strict guidelines around what funds you can transfer to a QROPS, and some other restrictions you need to be aware of.
2. Using a QROPS creates an advantageous tax scenario for you
There are some key differences in the way retirement funds in Australia and the UK are treated. It is these differences that make using a QROPS such an attractive option.
As you may be aware, you benefit from tax relief at your marginal rate on contributions into a UK pension, but funds you withdraw are treated as earned income and taxed accordingly.
The reverse situation applies in Australia where you are taxed on your super contributions – albeit at a concessional rate – but can draw lump sums and income from your fund with no tax payable.
This means that by transferring your UK pension to a QROPS in Australia you can create a “win-win” scenario for yourself. You’ll have received favourable tax treatment on your contributions and will then pay no tax on your retirement income.
3. There will be no UK tax charge on any transfer to a QROPS
Because all transfers from a UK pension scheme to a QROPS are authorised, you will not incur a UK tax charge when you transfer the fund.
In contrast, if you were to transfer to a non-qualifying arrangement you could face an HMRC tax charge of 55%.
This clearly makes it imperative that you ensure the scheme you transfer your pension to is suitably approved. We have heard cautionary tales of people transferring their pension in the mistaken belief they would not incur a tax charge, only to subsequently receive an unwelcome tax demand.
You should be aware, however that if the amount transferred has increased in value since you started your Australian tax residency (unless the transfer is within 6 months of your Australian tax residency), there will be a taxable element on the fund’s growth as far as Australian tax is concerned, called the “applicable fund earnings” (AFE).
4. There are limitations on transfer eligibility
You are only able to transfer your UK pension to a QROPS if you are over the age of 55 at the date of transfer. Be aware that this is rising to age 57 in 2028.
However, if you are currently under 55 or have not been resident in Australia for a long enough period there are some steps you can take to prepare for an eventual transfer.
If you worked in the UK for any appreciable length of time you may well have a series of different pension arrangements that you will ultimately want to transfer to a QROPS.
By consolidating these now into a single arrangement, you will make the eventual QROPS transfer far more straightforward than if you were transferring several different funds.
5. Not all UK pension schemes can be transferred to a QROPS
You should look through your different UK pension arrangements to see which can be transferred to a QROPS.
You can’t transfer the following:
- Any pension that is already in payment
- A government-backed defined benefit (DB) scheme, such as the NHS Pension Scheme
- Any company pension scheme in the PPF (Pension Protection Fund)
- Any annuities you’ve already purchased with a life insurance company.
You should also note that any UK State Pension you are entitled to cannot be transferred, although you can opt to have it paid directly to your Australian bank account.
6. You may be able to set up your own QROPS
You can’t transfer your UK pension into any Australian super fund you like.
The most common, and flexible option is to set up your own Self-Managed Superannuation Fund (SMSF). Once that has received HMRC approval as a qualifying scheme it can then receive transferred funds.
You’ll have full control over investment decisions and access to a potentially wider range of investment options than if you were in a retail or industry style super fund.
You can also benefit from making further contributions at concessional tax rates as you’re building your fund for retirement.
It’s common for family members to share a self-managed scheme so if you and your spouse are both transferring accrued UK pension funds, you can access the same SMSF.
7. Transferring to a QROPS can eliminate long-term currency risk
As well as the tax advantages you’ve read about, transferring your UK pension can also help mitigate against currency risk.
The exchange rate between the UK and Australia can fluctuate over time. The chart shows the movement of the UK pound against the Australian dollar over a five-year period up to 12 October 2023. During that time the rate has varied from between $2.09 and $1.68.
If you had been buying dollars with UK-based assets over those five years, it would have resulted in your income varying by up to 20% over that period.
Get in touch
If you have any queries regarding QROPS, or any aspect of your financial planning, please get in touch with us.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances.
All contents are based on our understanding of ATO and HMRC legislation, which is subject to change.