How the Overseas Transfer Allowance could affect your plans to retire in Australia

Category: Australia & News

Recently, we wrote about how the planned abolition of the Lifetime Allowance (LTA) could affect you, particularly if you are resident in the UK or have an accrued pension fund there. 

That article referenced new legislation that, at the time of writing (February 2024), is currently going through UK parliament intending to become law before the end of the current UK tax year in April. 

One unexpected item in the legislation that the UK chancellor, Jeremy Hunt, had not referenced when he announced the abolition of the LTA was the introduction of a new Overseas Transfer Allowance (OTA).

The OTA could affect you if, as the name suggests, you are planning to transfer your accrued pension fund overseas and retire outside the UK.

In this article, read about the OTA in more detail, what it could mean if you’re looking to transfer your accrued UK pension fund to an Australian super, and some steps you could take to help avoid a potential tax charge.

The new Overseas Transfer Allowance is coming into place

Transferring your UK pension to Australia is typically done by using a Qualifying Recognised Overseas Pension Scheme (QROPS).

These are overseas pension schemes that HM Revenue & Customs (HMRC) recognises as eligible to receive transfers from a registered pension scheme in the UK.

This article about QROPS gives you some insight as to how they work.

Since 2017, there has been an Overseas Tax Charge (OTC) on QROPS transfers, although if you are resident in the country to where the transfer is being made, the OTC does not apply. 

However, the new OTA means there will be a tax charge if you transfer a UK pension fund overseas, regardless of where you are resident, if it exceeds a certain value. The OTA is equal to the 2022/23 Lifetime Allowance (LTA) figure of £1,073,100.

This now becomes a key consideration if you’ve accrued a pension fund in the UK and are seeking to transfer it overseas.

You may face a tax charge when transferring your funds, depending on your circumstances

The new OTA could affect you if you’re currently living in:

  • The UK and planning to emigrate to Australia and then retire
  • Australia with an accrued pension fund back in the UK.

It means if the total amount you transfer to a QROPS exceeds £1,073,100 (or a higher amount for those with LTA protection), the excess will be taxed at 25%. 

This change is quite unexpected and was not in the draft Finance Bill published last year. We expect that it will apply to all transfers from 6 April 2024. 

Careful planning could help you avoid the Overseas Transfer Allowance tax charge

For those with balances  it is still possible to avoid a tax charge, even if the value of your UK pension fund exceeds the £1,073,100 amount. 

This can be done by taking advantage of the double taxation agreement between the UK and Australia.

The agreement effectively means you don’t pay tax twice – in both the UK and Australia – on the same amount of money.

It also takes advantage of the way that the Australian Tax Office (ATO) treat lump sums transferred from an external tax jurisdiction – in this case the UK to Australia. 

This example shows how a tax-efficient transfer could work

Let’s assume you have a sum of £2 million in your UK pension fund and are now resident in Australia. The most tax efficient way of extracting your funds from the UK will likely involve a combination of transfers to Australia and direct access from the UK. 

As you have read, you can transfer up to your OTA figure of £1,073,100 into a QROPS in Australia without an additional tax charge. 

You may need to do this over a period of time as there is a Non-Concessional Contribution Cap – currently $110,000 – that limits the amount you can transfer in any one tax year. You then take the balance of £926,900 from your pension fund as a one-off withdrawal, without incurring an OTA charge.  

If the withdrawal is arranged in such a way so that the taxing rights fall with Australia, this will not attract a UK income tax charge and, provided the earlier transfers to Australia have fully extinguished the Australian taxable component, it will also achieve a favourable Australian tax outcome. 

It’s important to mitigate the threat of currency risk on large transfers

Because of the potential size of the fund you are transferring, above the amount being transferred to a QROPS, it may be sensible to use a currency expert when moving your money.

Not only will they help you get the best exchange rate possible – which could be an important consideration on substantial sums of £1 million or more – but they can also help you guarantee a rate, regardless of how long the transfer may take. 

Transferring your entire remaining fund in one go also helps reduce long-term currency risk because you won’t have to worry about varying exchange rates throughout your retirement.

Expert advice can help you avoid unnecessary tax charges

Involving as it does two different tax jurisdictions, this kind of tax arrangement is understandably highly complex. As a result, we would strongly recommend that you seek expert advice if you do have a substantial UK-based pension fund that you want to move to Australia. 

Accessing advice becomes doubly important in these circumstances because of the potential complexity around transferring at least part of your accrued fund to a QROPS and having to stagger the transfer over several years.

In each case, mistakes could result in you being subject to an unwelcome tax charge. 

Furthermore, the changes we have set out here are a result of ongoing legislation (as of February 2024), which could be subject to amendment, so it’s important that you are acting on up-to-date information.

Get in touch

If you have any concerns about how the pension changes in April could affect you, please get in touch with us. 

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. 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.