Overseas transfers

If a member requests a transfer between one registered pension scheme and another it'll be a recognised transfer so long as certain conditions are met.
So what's this all about?
  • What is a QROPS?
  • Recognised transfers to QROPS
  • Overseas transfer charges from 9 March 2017
  • Advantages and disadvantages of QROPS
  • Non-recognised transfers - tax charges
  • Transfers from overseas schemes
  • 6 April 2017 Changes

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 an overseas pension scheme? Jersey, Guernsey and the Isle of Man are treated as being overseas. 

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. The conditions a QROPS must meet are:

  • The scheme must be a pension scheme, providing benefits in the event of retirement or death.
  • It must be an overseas pension scheme and
  • a recognised overseas pension scheme and finally
  • it must be a qualifying recognised overseas pension scheme.

PTM112000: Qualifying recognised overseas pension schemes

A QROPS is 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).

HMRC maintain a list of Recognised Overseas Pension Scheme (ROPS).  If a scheme appears on this list it confirms that the scheme meets the conditions to be a ROPS.  It does not confirm that the scheme is a QROPS which will have to be verified by the transferring firm’s due diligence on the scheme.

This list isn't exhaustive, as it doesn't include ROPS 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.

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).

The member must supply the scheme administrator the following details, their:

  • name
  • date of birth
  • national insurance number
  • principal residential address, if they are no longer in the UK they should also provide their last principal residential UK address
  • telephone number for use by HMRC in relation to the scheme

They also need to provide:

  • if they are no longer UK resident for tax purposes, the date that UK residence ended;
  • the QROPS name and address;
  • the country or territory under the law of which the QROPS is established and regulated;
  • written acknowledgement that the member is aware that a transfer other than a recognised transfer to a QROPS gives rise to an unauthorised payments charge and may give rise to an unauthorised payments surcharge.

On the final point above see the Non-recognised transfers - tax charges section below for more details. 

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:

  • the member is not UK resident and has not been UK resident at any time in the 10 years before the payment and
  • 10 years have passed since the transfer was made.

This means that:

  • Payments made within 10 years of the transfer have to be reported regardless of the member's residence status.
  • Even if the transfer was made more than 10 years ago, payments to members who are UK resident or have been in the last 10 years have to be reported.

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).

As a transfer to a recognised overseas pension scheme is a 'permitted transfer', enhanced or fixed protection will not be lost on such a transfer, including a transfer to a QROPS.

Even if the transfer to the QROPS is a recognised transfer there might still be a tax charge on the transfer.

The March 2017 Budget introduced a 25% tax charge on transfers to QROPS unless:

  1. The member is resident in the same country in which the QROPS is established.
  2. The member is resident in a country within the European Economic Area (EEA) and the QROPS is established in a country within the EEA.
  3. The QROPS is set up by an international organisation for the purpose of providing benefits for or in respect of past service as an employee of the organisation and the member is an employee of that international organisation.
  4. The QROPS is an overseas public service pension scheme and the member is an employee of an employer that participates in the scheme.
  5. The QROPS is an occupational pension scheme and the member is an employee of a sponsoring employee under the scheme.

The transfer charge can only apply to transfers where the transfer request was made on or after 9 March 2017. This doesn’t include casual enquiries; it would have to be an instruction from the member to the UK scheme administrator to transfer £x or x% of the UK pension fund to a named overseas pension scheme.

Within 30 days of the request the UK scheme administrator has to collect information from the member to allow the transfer to proceed. This can be done using form APSS263. The member then has 60 days to provide this information. If they don’t, the UK scheme administrator must deduct the overseas transfer charge if the transfer proceeds.

The charge also applies if someone is exempt at the outset, but their circumstances change during the ‘relevant period’ which is five full tax years so that none of the exceptions applies. The reverse is also true – the charge is refunded if it’s applied at the outset, but at least one of the exceptions becomes applicable during the relevant period.

The scheme and member have joint and several liability for the charge. This means the scheme should deduct and pay the charge to HMRC. But if it doesn’t, the member will end up paying the charge via self-assessment.

Advantages of QROPS

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 10 years and the transfer was at least 10 years ago) would be:

  • A higher tax-free cash lump sum.
  • No lifetime allowance limit (although the transfer is a BCE and could trigger a lifetime allowance charge at that time).
  • No restrictions on tax relief on contributions.

Disadvantages of QROPS

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:

  • The advice fees tend to be high - this is a specialised area needing a specialised adviser.
  • The charges levied by the scheme provider.
  • The actual tax treatment of benefits when they come to be paid.
  • Currency risks (unless set up in Channel Islands or Isle of Man), and
  • QROPS status can be withdrawn by HMRC if it's thought the QROPS has been stretching the rules too much and unauthorised payment charges can be applied retrospectively.

A non-recognised transfer may result in the following tax penalties:

  • An unauthorised member payment charge of 40% of the transfer value.
  • If all unauthorised payments in a 12 month period are more than 25% of the fund value, an unauthorised payments surcharge of 15% of the transfer value will be payable by the member.
  • The registered pension scheme will have to pay a scheme sanction charge of 40% of the transfer value. If the scheme administrator has deducted the member's tax charge from the transfer payment and paid the tax charge to HMRC on the member's behalf, the scheme administrator may reduce the amount of the scheme sanction charge by the lesser of 25% and the amount of member's tax charge deducted as a proportion of the transfer payment, and
  • If the amount of non-recognised transfers exceed 40% of the scheme's assets, it could be de-registered with a de-registration charge of 40% of the scheme's assets.

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 £100,000 from a recognised overseas pension scheme during 2017/18, his personal lifetime allowance will be 10% higher than the standard lifetime allowance (£100,000/£1,000,000). 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 2024 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.

A number of changes relating to the QROPS regulation have been brought in with effect from 6 April 2017.

  • When pension or lump sum is paid to a UK resident from a QROPS, all of the pension income will be chargeable to UK tax, in the same way as it would if it had been paid from a registered pension scheme. This is an increase from 90% that was chargeable to UK tax prior to April 2017. Any lump sum payments will also receive the same tax treatment as if it had been paid from a registered pension scheme.
  • UK tax charges can apply to a payment by a QROPS to an individual who has been resident outside the UK for less than 10 tax years (10-year rule). Prior to April 2017 this only applied to individuals who have been resident outside the UK for less than 5 years (5-year rule). This rule only applies to transfers paid after 6 April 2017.
  • The “70% rule" rule has been removed from the conditions for a scheme to be a QROPS. The reason for this is that since pension flexibilities there hasn’t a requirement to provide an income for life from a UK scheme and QROPS rules are just being aligned.
  • The pension age test was also amended so that if benefits are paid from a QROPS before normal minimum pension age (55) and they would be treated as an authorised payment if paid from a UK registered pension scheme they would also be an authorised payment.
  • The loophole where double PCLS could be paid, first by the QROPS then by the UK registered pension scheme after it’s been transferred back to the UK has been closed.

Notes 

PTM110000: International: contents

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.

Last updated: 22 Jun 2017

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