If you are an Australian living in the UK, or a Brit who has spent time living and working in Australia, understanding how your accrued superannuation fund is treated across borders is important.
For example, if you start drawing from your fund while you are a UK resident, you need to be aware of how this will be taxed.
Subject to your eligibility, you can usually draw from your superannuation fund free from tax in Australia, but it won’t be treated in the same way in the UK. This is because the UK treats super pensions as foreign income, and that income is generally taxable, regardless of whether you are taking regular amounts or drawing lump sums.
Because of this, as a UK resident, you must declare Australian super income on your UK self assessment tax return, even if it is paid directly into an Australian bank account.
This article examines one particular aspect of drawing from your super in the UK, Foreign Service Relief (FSR), and how it could provide tax advantages for you.
If you have spent time working outside the UK, you may be eligible for Foreign Service Relief
You may be entitled to FSR on lump sums you draw from your super fund if you return to the UK after living and working in Australia.
We would first determine whether your super meets the criteria of being able to claim FSR. For example, any previous transferred in UK pensions may require separate treatment and contribution history will need to be assessed. Broadly speaking, any fund accrued prior to April 2017, can usually be taken tax free.
Any increase in value from April 2017 will be taxable, less a 25% tax-free allowance.
As a result, your super fund may have both taxable and non-taxable elements, based on its 2017 value.
bdhSterling can provide you with a tax efficient strategy for withdrawing the funds and will support you in claiming the relevant relief.
You should also be aware that you have to draw income and lump sums from your super fund in proportion to the value of pre- and post-2017 amounts. Because of this, and because confirming the value of your super fund at certain historical dates can be complex, we recommend seeking expert guidance to ensure you access your funds effectively.
The new Foreign Income and Gains regime could also provide you with valuable tax advantages
As well as FSR, it’s also worth bearing in mind the new Foreign Income and Gains (FIG) regime when you’re planning withdrawals from your super fund while you are a UK resident.
If you have been abroad for a period of more than 10 years, the FIG regime provides you with a four-year window during which you can bring in overseas assets – including your super fund – free from UK Income Tax.
This presents a potentially advantageous opportunity for income planning, as you may be able to repatriate your super fund to the UK without incurring tax.
However, you need to note that if you previously transferred your UK pension into your super fund, this portion won’t fall under the FIG regime and, as a result, may be taxable and may require separate treatment.
With careful planning, both FSR and the FIG regime could help you generate tax-efficient income.
However, by making use of the new FIG regime, you will lose other allowances such as your Personal Allowance and Married Couple’s Allowance. Because of this, we would always recommend that you get expert advice.
Find out more: How the new Foreign Income and Gains regime could affect your financial planning
Expert advice can help you make the right financial decisions
The complexity of both FSR and the new FIG regime means that obtaining expert advice when planning withdrawals from your super fund is strongly recommended.
Not only will an expert be able to help you structure withdrawals to ensure maximum tax efficiency, but they will also be able to ensure that you avoid any errors that could be irreversible and easily lead to an unwelcome and unexpected tax demand.
At bdhSterling, we specialise in helping clients navigate the complexities of financial planning between the UK and Australia.
If you would like to discuss your own retirement plans, please get in touch with us today.
Please note
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; it does not take into account your personal objectives, financial situation, or needs.
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 HMRC and ATO legislation, which is subject to change.