If a transfer from one pension scheme to another isn't a 'recognised transfer' bad things happen. Basically, the transfer value is regarded as an unauthorised payment with all sorts of tax consequences which we'll look at later.
So what if someone moves abroad and wants to transfer to a foreign pension scheme?
HMRC's starting point is that it doesn't want pension funds which have enjoyed UK tax benefits to be able to be transferred to overseas schemes which don't have the same restrictions.
However, rather than ban overseas transfers altogether or penalise them so much that it has the same result, HMRC will, in some circumstances, treat a transfer to an overseas scheme as a recognised transfer. The scheme manager of the overseas scheme has to supply certain information to HMRC and the scheme has to meet certain conditions. If this is done, HMRC will recognise it as a Qualifying Recognised Overseas Pension Scheme (QROPS) and transfers to it from UK schemes will be recognised transfers.
There are various 'hurdles' a scheme has to overcome before HMRC will recognise it as a QROPS. A QROPS needs to meet the conditions to be:
A QROPS is therefore the top of the tree in HMRC's eyes when it comes to foreign pension schemes. However, even if all the requirements are met, HMRC can refuse to recognise an overseas scheme (for instance if it doesn't provide all the information it said it would).
This list isn't exhaustive, as it doesn't include QROPS which haven't consented to have their details published. The trustees of a UK scheme therefore need to first refer to the list and if the scheme the transfer is destined for doesn't appear, ask HMRC whether the scheme is a QROPS or not. If it is not, the transfer will be an unauthorised payment resulting in tax penalties.
A QROPS has to:
To notify HMRC, the overseas scheme manager can use the online system. There are guidance notes to help.
Here's the full conditions.
Unlike a recognised transfer between two UK registered pension schemes, a transfer from a UK scheme to a QROPS is a benefit crystallisation event. So if the amount of the transfer is over the relevant lifetime allowance, a lifetime allowance charge will be levied. However, because the payment is not to the member, the rate charged is 25%, not 55%, despite the fact that it involves a lump sum. There will be no effect on the annual allowance as it isn't a contribution (although all contributions made in the pension input period up to the date of transfer obviously will).
Some overseas schemes (for example schemes in the USA) may not accept the transfer value.
The UK scheme administrator must report the transfer to HMRC (they would also have to report a non-recognised transfer). They must also get a signed acknowledgement from the member that they understand that a transfer overseas could result in them having to pay unauthorised payment charges to HMRC after the transfer is made. See the Non-recognised transfers - tax charges section below.
The QROPS scheme manager must agree to tell HMRC when they pay benefits from the transferred fund or if they transfer the fund again. This reporting requirement applies unless:
This means that:
Any payment or transfer made in the reporting period which wouldn't have been an authorised payment or recognised transfer from a UK registered pension scheme will suffer the normal tax penalties (see below).
A transfer to a QROPS is not a chargeable event for inheritance tax purposes.
The QROPS itself is not subject to inheritance tax and therefore doesn't suffer periodic or exit charges.
As a transfer to a recognised overseas pension scheme is a 'permitted transfer', enhanced protection will not be lost on such a transfer, including a transfer to a QROPS.
If the transfer contains a guaranteed minimum pension (GMP) there are other things the UK scheme has to do before the transfer can go ahead. It has to:
Exactly what can be paid from a QROPS depends on the tax regime of the country it's established in but the most common advantages (after the member has been out of the UK for at least five tax years) would be:
If the member remains in the UK, it's difficult to see what advantage there would be in transferring to a QROPS as any payment from the scheme that would have been an unauthorised payment from a UK scheme will attract charges of up to 55%.
Even if the member is likely to satisfy the '10 years' rule, the advantages of a QROPS have to be weighed against:
A non-recognised transfer may result in the following tax penalties:
Never mind - at least a non-recognised transfer doesn't count towards the annual allowance or the lifetime allowance!
In this case, a transfer is coming from a pension scheme which is not regulated and taxed by HMRC to one that is. Almost all pension transfers from overseas pension schemes to UK registered pension schemes are allowable and treated in a similar way to recognised transfers. However, a registered pension scheme isn't obliged to accept the transfer.
Overseas transfers into registered pension schemes aren't recognised transfers. However they aren't unauthorised payments either as unauthorised payments can only come from UK registered pension schemes. The transfer doesn't count as a contribution and therefore doesn't get tax relief and doesn't count against the annual allowance. It's also not a benefit crystallisation event (BCE), and doesn't trigger a test against the lifetime allowance at time of transfer. However, it will count against the lifetime allowance when a BCE does occur.
If the transfer is from a recognised overseas pension scheme, the member's lifetime allowance can be enhanced by the same percentage as the transfer value bears to the standard lifetime allowance at time of transfer. So if John has a transfer of £125,000 from a recognised overseas pension scheme during 2014/15, his personal lifetime allowance will be 10% higher than the standard lifetime allowance (£125,000/£1,250,000). This recognises the fact that the transferred funds haven't received any tax advantages from HMRC. A member has up to five years from 31 January following the tax year in which the transfer is made to claim this enhancement by registering it with HMRC. So John has until 31 January 2021 to register his claim to an enhancement to his lifetime allowance. It's important to note that this enhancement is only available if the transfer is from a recognised overseas pension scheme - if it is not a recognised scheme, the enhancement can't be claimed.
Published 28 February 2007
Updated 22 March 2014
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.
In addition, the information provided is also based on our current understanding of the relevant Finance Acts.