Have you ever wondered what would happen to wealth you hold in your UK pension funds when you pass away?
More importantly, what if you’re living in Australia and still have private or company pension funds in the UK, or you’re currently in the UK but plan to move to Australia to retire?
Understanding the death benefits of your UK pension is important, and transferring your pension to Australia may provide significant advantages for your beneficiaries.
This has become even more crucial following the UK Autumn Budget in 2024, when it was proposed that pension funds should be included in the value of a person’s estate from April 2027, making them potentially subject to a 40% Inheritance Tax (IHT) charge.
Death benefits on your UK pension funds
If you are living in the UK, what currently happens to any UK pension fund you have at the time of your death will depend on how old you are:
- If you die before your 75th birthday, the full value of your fund passes, tax-free, to your beneficiaries.
- If you die after you reach 75, your beneficiaries will pay tax on lump sums or income they draw from your fund at their marginal rate of Income Tax.
But, as you have read, from April 2027 any funds remaining in your pension when you pass on are set to be included in the value of your estate for IHT purposes, and will be taxed at 40% if the value exceeds the IHT threshold.
If you are an Australian resident at the time of your death (after age 75), any beneficiaries who are also living in Australia will pay Income Tax on any amount they draw from any pension fund they inherit at their marginal rate.
However, if they take the fund as a lump sum, beneficiaries will only be liable for tax on the growth on the fund from when you arrived in Australia to the date of your death.
3 key benefits of transferring your UK pension into an Australian super
Now, compare the above scenario to the far more advantageous situation in which you transfer your accrued UK pension funds to an Australian super.
- A tax-free lump sum for your dependants
If you‘re over 60, super rules mean that the remaining value of your fund passes to your dependant beneficiaries as a tax-free lump sum upon your death.
- A lower tax rate for non-dependants
Even if your beneficiary is a non-dependant, tax will only be payable on the taxable components, which are concessional contributions, investment growth, and applicable fund earnings. This rate is just 17%, including the Medicare levy.
- A significantly lower rate of tax
As only a portion of your Australian super will be taxable, the overall tax charge is likely to be significantly less than if your pension was held in the UK. In those circumstances, the whole pension may be taxable should you pass away after the age of 75, and potentially subject to IHT from April 2027.
Expert advice can help you make the right decisions
The key takeaway from this is that if you’re living in Australia, with a retained pension in the UK, transferring your UK pension to an Australian fund could secure a more tax-efficient outcome for your beneficiaries and avoid any UK IHT liability.
However, it’s important to note that not all UK pensions can be transferred, and there are restrictions with regard to the timing of such a transfer, and the amount you can tax-efficiently transfer each year.
Each person’s circumstances are different and given the complexity, we would strongly recommend that you get expert advice to ensure any potential transfer is appropriate.
Get in touch
At bdhSterling, we have a wealth of experience when it comes to providing financial advice and guidance for people moving from the UK to Australia. If you would like to find out more details, get in touch with us through our contact form here, or email enquiries@bdhsterling.com. We offer a FREE initial consultation to discuss your options.
Important information
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.
