A] Prelude
For more information on pension systems, risk and coverage, feel free to visit our dedicated webpages:
https://expatpensionholland.nl/uk-expat-pensions
https://expatpensionholland.nl/global-pillars-systems
https://expatpensionholland.nl/global-investments-risks-0
https://expatpensionholland.nl/global-social-security-coverage
B] The Issue
Retirees benefiting from a loophole that allowed double tax-free cash allowances are scrambling to revise their plans after it was closed. After the lifetime allowance (LTA) – a limit on the amount you could save in your pension without attracting a tax charge – was scrapped, a loophole allowed people to leave £1,073,100 in their UK pension and transfer the remainder into a qualifying overseas scheme.
This allowed them to take a quarter of their pot – £268,275 – tax-free from their UK scheme, as well as a tax-free cash entitlement from their overseas scheme. But a new rule means that more people transferring money abroad will be hit with an overseas transfer charge (OTC).
Rachel Vahey from AJ Bell, said the closure of the loophole has caused “chaos” for overseas retirees. “HMRC has removed the exclusion that the overseas transfer charge will not apply if someone transfers to a qualifying recognized overseas pension scheme (QROPS) in the European economic area or Gibraltar, even though they were not resident in the same country.
“One consequence is those who want to retire overseas, but where there are no QROPS registered in their new country of residence, will be forced to keep their pension scheme in the UK or face a 25 per cent charge on transfer. “As overseas residents may struggle to hold a UK bank account, and many UK pension schemes won’t pay to non-UK bank accounts, this could leave these overseas retirees in a difficult position.
“Even where they can hold an account, they still face a harsh choice whether to juggle currency risks when taking pension income or lose 25 per cent of their pension wealth on transfer.” During Rachel Reeves’s Budget, she said the move, which was implemented with immediate effect, will “address the risk of individuals receiving double tax-free allowances”.
The loophole existed for more than six months and the Government claims in its costings document that its closure will raise up to £5m a year. Ms. Vahey said worried pension members have been in touch concerning their retirement plan following the decision. The new rule will create serious difficulties for people who want to reside in one country and transfer their pension to another one.
For example, if someone moved to France and wanted to move their pension with them, they wouldn’t be able to as there are no QROPS in the country on the HMRC list. Countries on the list include Australia, Canada, Germany, Hong Kong, India and Luxemborg.
If someone is looking to move to a country without a QROPS, they should move their pension scheme to a country like Malta or Gibraltar which are both popular choices for people in this situation. They would, however, face a 25 per cent charge to do so.
John Clare from QB Partners, said many retirees benefitted from this loophole that allowed them to “double dip”. A policy paper by HMRC identified the loophole as a potential reason for around £1bn of UK tax-relieved pension savings being transferred overseas.
“Whilst there are some UK pension solutions that are suitable and available to non-UK residents, many UK pension members face issues when trying to manage and access their pensions overseas. “QROPS provided the necessary portability and flexibility for many to receive an income in their local currency, into their local bank account, without double taxation because of automatic UK withholding taxes.
C] Finally
“It is important that UK pension members living overseas seek specialist advice before making any decisions regarding their benefits.” David Denton, technical consultant at Quilter Cheviot, highlighted that Reeves’s decision to bring unused registered pensions into the inheritance tax (IHT) net in the Budget will also apply to QROPS, so for most, “few if any benefits remain”.