If you are a UK expat in Australia, or an Australian living and working in Britain, your UK pension may be an important part of your overall wealth.
However, significant changes to UK Inheritance Tax (IHT) rules are due to take effect from April 2027, and they could have implications for how your pension is treated as part of your estate, regardless of where you are living.
It’s important to understand what is changing and why reviewing your retirement and estate planning before the changes come into effect should be one of your financial planning priorities.
From April 2027, your UK pension fund could become liable for Inheritance Tax
Under the current rules, most defined contribution pension funds are generally outside your estate for UK Inheritance Tax purposes.
This means that, in many cases, pension assets can be passed to nominated beneficiaries without increasing the value of your taxable estate.
From April 2027, the UK government are changing the rules so that pension savings and scheme death benefits, that were previously sheltered from IHT, may become subject to tax as part of your estate.
Because of this, if your pension forms part of your taxable estate after April 2027, your beneficiaries could face a larger IHT liability than under the current rules.
The £2 million taper could increase your Inheritance Tax bill
The proposed inclusion of unused pension funds within the scope of IHT could have an additional consequence. It may increase the overall value of your estate to a level where valuable tax allowances begin to be reduced.
One of these is the residence nil-rate band of £175,000. This is an additional IHT allowance that may be available when your main residence is passed to your direct descendants. However, this allowance is subject to a taper once your estate exceeds £2 million.
The taper reduces the available nil-rate band by £1 for every £2 that your estate exceeds the £2 million threshold. For larger estates, this can result in the allowance being reduced significantly or lost altogether.
So, when unused UK pension funds are brought into your estate from April 2027, you may find yourself exceeding the threshold.
Living overseas does not necessarily remove your exposure to UK tax rules
As a UK expat in Australia, you may still hold UK pension arrangements, including private arrangements or workplace pensions accumulated during your career.
Furthermore, if you have only migrated to Australia relatively recently, you may still be deemed a “long-term resident” under UK IHT rules, and all your assets will be liable for IHT. This is known as your IHT “tail”.
Similarly, if you’re an Australian who worked in the UK before returning home, or you are still living in the UK, you are likely to have pension benefits there.
Depending on your overall circumstances, including your tax residency, the type of pension you hold, and the location of your assets, these proposed changes could affect the amount ultimately passed to your beneficiaries.
Cross-border financial planning has always been complex, and these reforms may make it even more important to ensure your UK and Australian planning work together, and that you get advice from an expert to ensure you are planning efficiently.
Transferring Your UK Pension to an Australian QROPS
If you ultimately intend to retire in Australia, the proposed changes to UK Inheritance Tax provide a timely opportunity to review where your retirement savings are held.
As part of that review, it may be appropriate to consider transferring your UK pension to a Qualifying Recognised Overseas Pension Scheme (QROPS) in Australia. For many expats, this can form an important part of a broader retirement and estate planning strategy.
A transfer can offer several potential advantages. One of the most significant benefits is the opportunity to receive tax relief while building your pension in the UK, before potentially accessing retirement benefits under Australia’s superannuation system, where your pension income can be tax-free.
However, transferring a UK pension is a highly specialised area that requires careful planning, and your ability to transfer to a QROPS will depend on several criteria, including your age and the types of UK pensions you hold.
Because of this, we would always recommend that you get expert advice from a financial adviser who specialises in UK-Australia pension transfers.
Find out more: 7 key facts about QROPS you need to know if you are living in the UK
These changes highlight the importance of ongoing cross-border financial advice
Although the proposed reforms could clearly affect your long-term financial planning, it’s important not to make rushed decisions.
Instead, you should view the period before April 2027 as an opportunity to understand your current position and to review your estate planning arrangements carefully.
It’s important to appreciate that, as an expat, retirement planning rarely involves just one country’s tax system.
Because of this, professional advice from advisers experienced in both the UK and Australian financial systems can help identify potential issues before they become costly mistakes.
While every situation is different, having a coordinated strategy can help ensure your retirement savings are structured as efficiently as possible.
Find out more: Major changes to UK Inheritance Tax rules could affect your estate planning
Get in touch
bdhSterling are widely regarded as the leading UK-to-Australia pension transfer specialists. All our advice is delivered in-house by dual-qualified UK FCA- and Australian ASIC-licensed advisers – not outsourced firms or affiliate partners.
This means you receive fully integrated, compliant, cross-border financial advice from one specialist, coordinated team.
Working with us can give you the confidence and peace of mind that comes from having an effective, robust financial plan in place.
If you would like to discuss your own financial 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 content is based on our understanding of HMRC and ATO legislation, which is subject to change.