With Brexit looming, it’s an opportune moment for expats to consider the tax implications of their pension funds.
If you have pension funds in the UK, you’re limited by the amount of tax-relieved pension that you can build up over time. This is the Lifetime Allowance and, since 2012, the allowance has reduced significantly.
This means that if your total pension benefits are above the Lifetime Allowance, you could face a tax bill of 25% or even 55% without realising it.
However, you do have a potential solution through which pension can continue to increase in value without being tested against the Lifetime Allowance when you come to draw it. And with Brexit potentially affecting this solution, now is the time to act.
What is the Lifetime Allowance and how does it affect me?
Her Majesty’s Revenue & Customs (HMRC) sets a Lifetime Allowance which limits the maximum amount of tax-relieved pension that can be built up over an individual’s lifetime.
In recent years, the Lifetime Allowance has fallen significantly, and in the 2020/21 tax year, the allowance is £1,073,100.
While there is no limit on the value of pension savings that you can build up, if they exceed the Lifetime Allowance when they are taken, the amount above the allowance will be subject to a tax charge known as the Lifetime Allowance charge. This could result in a tax charge of up to 55%.
What is a QROPS and how does it benefit me?
QROPS stands for ‘qualifying recognised overseas pension scheme’.
A QROPS is an overseas pension scheme that HM Revenue & Customs (HMRC) recognises as eligible to receive transfers from a registered pension scheme in the UK.
As we saw above, your pension funds are tested against the Lifetime Allowance when you access your money. This is called a ‘benefit crystallisation event’.
A recognised transfer from a registered pension scheme to a QROPS before age 75 is such a ‘benefit crystallisation event’. So, at this time, your pension fund would be tested against your Lifetime Allowance.
If you have exceeded the Lifetime Allowance, the amount of tax you pay depends on the way funds are withdrawn:
- 55% for lump sums
- 25% for income or transfers to an overseas pension.
However, if you transfer one or more UK pensions into a QROPS and your total benefits are under the Lifetime Allowance limit (£1,073,100 in the 2020/21 tax year) you will not face Lifetime Allowance taxes on the transfer.
If you’re affected by this issue, it may be attractive to act now due to market conditions.
If you’re a UK resident, or an expat living in Europe, you should make sure the QROPS is within the European Economic Area (EEA), such as Malta, otherwise, you would still lose 25% through the UK’s ‘overseas transfer charge’.
If you’re an expat outside Europe, the transfer would be subject to an ‘overseas transfer charge’ unless the QROPS is located in the jurisdiction where you reside.
As well as limiting your exposure to Lifetime Allowance charges, a QROPS can provide tax-efficiency, currency flexibility and estate planning advantages. If you are thinking of moving overseas, or you already live abroad, there are several additional reasons to consider transferring your pension to a QROPS:
- You want your pension to be in the country where you live
- You want your pension to be paid in the currency of the country where you live, perhaps to avoid exchange rate fluctuations
- It may be easier to monitor regulation and law changes in the country where you live.
Using a QROPS for Lifetime Allowance planning
Under the current rules, once your pension funds have been transferred to a QROPS they can grow without further assessment regarding Lifetime Allowance limits.
If you don’t make a transfer, and a benefit crystallisation event occurs within the UK scheme, you could face a tax charge if you exceed the Lifetime Allowance. A tax of up to 55% will be charged on the excess growth surplus at the next benefit crystallisation event (25% if taken as income)
So, by transferring to a QROPS, you could save 55% on all future growth of your pension fund. This is a significant planning opportunity if you are likely to have Lifetime Allowance issues in the future.
How Brexit could change this
Currently, UK residents can transfer to a QROPS that is established in a country within the EEA without incurring an overseas transfer charge of 25%.
However, it remains to be seen whether UK residents will be able to continue to transfer to countries within the EEA after 31st December 2020.
Once the transition period from the UK’s departure from the European Union ends, transfers may incur a 25% overseas transfer charge. It is therefore worth considering whether you should take this action before Brexit formally happens at the end of 2020.
Note that if you change residency within the first five full UK tax years from the date of the original transfer to the QROPS, then a 25% overseas transfer charge could apply.
Get in touch
We’re experts in QROPS and overseas pension transfers and we can help you tackle issues with the Lifetime Allowance. We’re also the only Chartered company that has dual-qualified advisers in both Australia and the UK. To find out how we can help you, please get in touch.