Everything you need to know about transferring your UK pension to Australia

Category: News

If, at some stage, you’ve lived and worked in the UK, it’s very likely that you will have accrued a pension fund.

If you’re now settled in Australia, with a view to retiring, you are therefore in the awkward position of having a potentially substantial pension fund in a different country, subject to different taxation and pension legislation.

One potential solution is to transfer your UK pension into an Australian super fund.

We covered this in a recent webinar and, in this article, we look at some of the key issues around transferring your UK pension to Australia.

The decision to transfer

Every decision to transfer will be unique. There will be circumstances when a transfer is not the right choice, and there will be times when a transfer is not possible. We’ll look at both in the next section.

To begin with, however, here are three key reasons why you should consider transferring.

  1. To avoid currency risk

If you simply start taking money from the pension as it stands in the UK, currency risk – the fluctuating cost of switching your funds from UK pounds to Australian dollars – could eat into the value of your pension.

For example, the table below shows the changing sterling to dollar exchange rate over the past five years.

Source: xe.com

Over the five-year period, the highest exchange rate was $2.04, and the lowest $1.59. That’s a spread of more than 20%.

Given that stability of income is all-important once you’ve retired and are no longer earning, such fluctuations, impacting your regular income, could make a real dent in the value of your pension.

By transferring your full UK pension to an Australian super, you avoid that risk.

  1. For advantageous tax treatment

It’s likely you’ll have benefited from advantageous tax treatment on UK contributions in the form of tax relief at your marginal rate. When you come to take your pension, 25% will be tax-free but you’ll pay Income Tax on the rest.

As you’ll probably be aware, withdrawals from a super fund are free of tax. So, by transferring your UK pension to a super, you’ll get the best of both worlds – tax-incentivised contributions on the way in, and then no tax on the way out. Truly a “win-win” situation.

You will only pay tax on the growth in the value of the fund between when you arrived in Australia and when you transfer.

  1. You can consolidate all your funds into a single arrangement

By transferring your UK pension to a super, you’ll be able to have all your funds in one single plan.

This will make them much easier to keep track of – you won’t be having to look at different values in different currencies – and, therefore, much more straightforward to manage the income you are taking.

You will also have full control over your investment strategy.

A transfer is not always the right choice

As with a lot of issues in financial planning, there is no “one size fits all” solution. That’s certainly the case when it comes to transferring your UK pension.

Sometimes it may not be the right thing to do.

For example, the charges you’ll incur for transferring may be prohibitively high – especially with a relatively small fund.

Additionally, you may be happy with your current investment choice and with the current set up and arrangements of the scheme.

Finally, you may be uncertain about where you’ll be living in the future. If you believe that, at some stage, you may well be returning to the UK – or moving regularly between here and there – then transferring may not be the best step.

In all these cases, we’d stress that financial advice is crucial. Making the wrong decision could prove costly.

Not all UK pensions can be transferred

Not all pensions can be transferred to a super.

There are three main types of UK pension that you can transfer:

  • Company pensions
  • Private personal pension
  • Funded public sector defined benefit schemes

However, there are some pensions that you can’t transfer:

  • Your UK State Pension – this can be paid to you in Australia, but will not increase in payment each year
  • Government unfunded pensions, such as the NHS pension scheme
  • Company pensions that are in the PPF (Pension Protection Fund)
  • A company pension from which you’re already taking a pension
  • Annuities you’ve purchased with a life insurance company.

Your age can have a bearing on the transfer process

If you’re under 55 you can’t transfer your UK pension to a super straight away.

There is usually an intermediate step to take before you reach the required age to fulfil a complete transfer.

This typically involves transferring to a UK-based self-invested personal pension (SIPP). The flexibility of a SIPP means you’ll still have full control over your investments – so you’ll be able to invest in Australian stocks and funds if you want to.

As SIPPs are not considered part of your UK estate, it also means that 100% of the value of your fund will pass to your spouse or children in the event of your death.

Once you reach 55, you can start a transfer to an Australian super via a qualifying recognised overseas pension scheme – known as a “QROPS”.

You use a QROPS to transfer

QROPS were first introduced in 2006.

As the name suggests, it’s an overseas pension scheme that meets certain stringent requirements set out by HMRC in the UK.

By transferring your UK pension to a QROPS, you will be moving your fund to under Australian financial jurisdiction. It can then be denominated in Australian dollars, removing currency risk.

Additionally, you won’t pay tax when you start taking a pension from your fund.

Generally 100% of your pension passes to your dependants when you die.

Expert advice is essential

Given the regular changes to pension and taxation rules in both the UK and Australia, specialist advice is essential.

There are substantial penalties of up to 55% of the fund value that can be applied to any transfers that do not comply with HMRC rules regarding QROPS.

So, mistakes can be costly and, in most cases, are irreversible.

Watch our recent webinar on this subject

We recently ran a very successful webinar about transferring your UK pension to Australia.

Partnered by the Australian British Chamber of Commerce (ABCC), we looked in detail at all the issues raised in this article.

We also covered a lot of other relevant information, and answered several key questions put to us by the webinar attendees.

Get in touch

We have a wealth of experience when it comes to helping clients transfer their pension funds from the UK to Australia.

If you’d like more information about the issues we’ve raised in this article and in our webinar, please get in touch with us.