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:
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:
They also need to provide:
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:
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).
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:
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.
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:
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 £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.
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.