As well as receiving tax relief on your personal contributions, one of the key benefits of a UK company or private pension is that you can usually take 25% of the value of your fund free from Income Tax.
However, if you are planning to retire in Australia, you need to be aware that, in certain circumstances, you may end up being liable for tax on this amount.
Read on to discover more about what these circumstances are, and how you can go about protecting your tax-free cash entitlement.
Your tax-free cash amount gives you valuable income flexibility
Your tax-free cash entitlement from a UK pension is a valuable benefit, which could save you a substantial amount of tax.
Subject to the size of your pension fund, you can take up to £268,275 tax free. This is known as your Lump Sum Allowance.
Because of this, if you’re planning to retire in the UK, using your tax-free entitlement effectively will become an important part of your retirement income planning.
You can access your fund from age 55, rising to age 57 in 2028.
The flexibility provided by UK Pension Freedoms legislation means that you can either take this in one go, or in separate one-off or regular amounts.
This enables you to use it tactically to mitigate the amount of Income Tax you are liable for, or to earmark it for specific purposes.
You may not be able to access your tax-free cash entitlement if you are drawing your UK pension while living in Australia
You may have accrued a UK pension fund during your working life, and are now planning to retire in Australia.
This could be if you are Australian and have spent some time working in the UK, or if you are British and have decided to spend your retirement years in Australia.
In these circumstances, it’s important to be aware that, as an Australian resident, any money you draw from your UK pension fund will be subject to tax.
In the case of your tax-free cash entitlement, this will be charged on the investment growth in the tax-free element between the date of your arrival in Australia, and the date you draw it.
This could potentially result in a substantial tax bill. For example, you may have arrived in Australia some time ago and have simply left your UK fund invested until you need to provide yourself with retirement income. Given the performance of markets over the last 15 years, the growth element could be considerable.
However, there are some effective ways you can mitigate the amount of tax you will be liable for in these circumstances, or even remove any liability entirely.
This will typically involve transferring the growth element of your fund to a Qualifying Recognised Overseas Pension Fund (QROPS) based in Australia.
You should be aware, however, that if you have started drawing from your fund prior to accessing it from Australia (known as “crystallising” your fund), you will not be able to transfer it.
As this can be a complicated process, we would strongly recommend you get expert advice if you are thinking of doing this.
You may be able to transfer your entire UK pension fund to an Australian super
Arguably, the most effective way to protect the tax-free cash element of your UK pension fund is to transfer the whole fund to a QROPS once you have become an Australian resident and are over age 55 (rising to 57 in 2028).
By doing this, you could create a financially advantageous scenario for yourself whereby you can access your entire fund free of tax, having previously enjoyed tax relief on your contributions in the UK. Very much a “win-win” outcome!
Additionally, there are two other major benefits of transferring your pension fund to a QROPS:
- Your fund will be administered and managed in the same country you are living in.
- The investments in your fund will be denominated in the same currency as your retirement income, removing any currency risk associated with transferring assets from the UK.
As you will appreciate, it’s worth exploring whether transferring your UK pension to an Australian QROPS is beneficial and whether you are eligible to do so.
Not all UK pensions can be transferred, and even in the case of ones that are eligible to be transferred, the process can be complicated.
Again, we would strongly recommend that you get expert advice, as errors could result in you facing an unwelcome tax charge.
Find out more: 6 of the most common questions we get asked about QROPS
7 key facts about QROPS that you need to know if you have pension assets in the UK
Get in touch
If you have any queries regarding accessing your tax-free cash and transferring your UK pension to Australia, please get in touch with us.
Please note
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.
A UK pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
All contents are based on our understanding of HMRC and ATO legislation, which is subject to change.