Can an individual transfer their pension savings to a pension plan in another country? And are there any tax implications?
The short answer is yes. But there are a number of requirements and restrictions that apply.
HMRC's starting point is that it doesn't want pension funds which have enjoyed UK tax benefits to be transferred to overseas schemes which don't have similar restrictions to the UK.
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 must supply certain information to HMRC and the scheme must 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 a recognised transfer.
Some overseas schemes (for example schemes in the USA) may not accept the transfer value.
What is a QROPS?
There are various 'hurdles' a scheme must overcome before HMRC will recognise it as a QROPS. To be a QROPS all of the following conditions must apply:
- The scheme must be a pension scheme, providing benefits in the event of retirement or death.
- It must be an overseas pension scheme as defined in HMRC - Pensions Tax Manual - PTM112200.
- A recognised overseas pension scheme (ROPS) as defined in HMRC - Pensions Tax Manual - PTM112300.
- The ROPS must become a QROPS as defined by legislation s169(2) Finance Act 2004.
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 maintains a list of 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. It is the trustees of a UK scheme's responsibility to check whether the scheme is a QROPS or not. If it is not, the transfer will be an unauthorised payment resulting in tax penalties.
What does overseas mean?
We get a surprising number of questions about this. There is sometimes confusion but the Republic of Ireland, Jersey, Guernsey and the Isle of Man are not part of the United Kingdom. Nor are any other further flung Crown dependencies such as the Falkland Islands.
Are there any issues if they remain in the UK and transfer to a QROPS?
A number of changes relating to the QROPS regulation were brought in from 6 April 2017.
When a pension or lump sum is paid to a UK resident from a QROPS, all of the pension income is chargeable to UK tax, in the same way as it would if it had been paid from a registered pension scheme. Any lump sum payments may be taxed as pension income depending on the tax rules that apply in the country the QROPS is registered.
Payments out of funds transferred to a QROPS on or after 6 April 2017 are subject to UK tax rules for five tax years after the date of transfer, regardless of where the individual is resident.
The pension age test was also amended so if benefits are paid from a QROPS before normal minimum pension age of 55, they're treated as an authorised payment in the same way an authorised payment is made from a UK registered pension scheme (for example under serious ill-health).
It's not possible for a pension commencement lump sum to be paid first by the QROPS, then by the UK registered pension scheme, if it has been transferred back to the UK.
What are HMRC's requirements in respect of the transfer of a UK registered pension scheme to a QROPS?
When an individual requests a transfer to a QROPS, the administrator of the transferring scheme will ask the individual to provide various details about themselves and details of the scheme they would like to transfer to.
Details of the information required can be found in HMRC – Pensions Tax Manual: PTM102900 - Transfers to a QROPS: member actions - information to be provided before the transfer
An individual’s written acknowledgement
The individual must sign a written statement confirming they're aware a transfer other than a recognised transfer to a QROPS:
- gives rise to a liability under section 208 (unauthorised payments charge), and
- may give rise to a liability under section 209 (unauthorised payments surcharge).
They must also acknowledge in writing they are aware:
- that a recognised transfer to a QROPS may give rise to a liability to the overseas transfer charge, and
- of the circumstances in which liability arises, liability is excluded from the outset, and liability is excluded only if conditions continue to be met over a period of time.
QROPS scheme manager's requirements when benefits are paid or transferred
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 individual 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
- Payments made within 10 years of the transfer must be reported regardless of the individual's residence status.
- Even if the transfer was made more than 10 years ago, payments to individuals 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 qualifying recognised overseas pension scheme is a 'permitted transfer', enhanced or fixed protection will not be lost on such a transfer.
The UK scheme administrator must report the transfer to HMRC (they would also have to report a non-recognised transfer).
What is the impact on the individual if it isn’t a recognised transfer?
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 payment surcharge of 15% of the transfer value will be payable by the individual.
- 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 individual's tax charge from the transfer payment and paid the tax charge to HMRC on the individual's behalf, the scheme administrator may reduce the amount of the scheme sanction charge by the lesser of 25% and the amount of the individual'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.
Is there a difference between uncrystallised and crystallised rights?
Unlike a recognised transfer between two UK registered pension schemes, a transfer from a UK scheme to a QROPS is a benefit crystallisation event.
Since 6 April 2023 there is no lifetime allowance charge if benefits are over the lifetime allowance. There is also no income tax deducted.
Before 6 April 2023, if the amount of the transfer was over the relevant lifetime allowance, a lifetime allowance charge was levied.
However, because the payment was not to the individual, the rate charged was 25%, not 55%, even though it involved a lump sum. There's 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 are tested against the annual allowance).
If benefits were in respect of a pension drawdown plan, which started before 6 April 2006, there's no BCE 8 on transfer.
If benefits were designated as drawdown from 6 April 2006, they'll have been tested against the lifetime allowance (BCE1) or scheme pension (BCE2). To stop double counting, the overlap provision applies. The BCE1 or BCE2 amount is deducted from the value being transferred BCE8. The difference is tested against the individual's remaining lifetime allowance and any excess would have had a 25% charge deducted.
When does the overseas transfer charge apply?
Even if the transfer to the QROPS is a recognised transfer there might still be a tax charge on the transfer.
The Budget on 9 March 2017 introduced a 25% tax charge on transfers to QROPS, the charge will apply if none of the following conditions are met:
- The individual is resident in the same country in which the QROPS is established.
- The individual is resident in the UK, Gibraltar or a country within the European Economic Area (EEA) and the QROPS is established in Gibraltar or a country within the EEA.
- 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 individual is an employee of that international organisation.
- The QROPS is an overseas public service pension scheme and the individual is an employee of an employer that participates in the scheme.
- The QROPS is an occupational pension scheme and the individual 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.
Within 30 days of the request, the UK scheme administrator must collect information from the individual to allow the transfer to proceed. This can be done using form APSS263. The individual 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 from the date of the transfer - 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 individual 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 individual will end up paying the charge via self-assessment.
Can an individual transfer from a QROPS, or an unregistered overseas pension scheme, to a UK registered pension scheme?
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. But they aren't unauthorised payments either. This is because 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 and doesn't trigger a test against the lifetime allowance at time of transfer. However, it will count against the lifetime allowance when a benefit crystallisation event does occur before the lifetime allowance is completely removed.
If the transfer is from a QROPS or former QROPS, the individual's lifetime allowance can be enhanced by the same percentage as the transfer value bears to the standard lifetime allowance at time of transfer.
For example. Let's take John who has a transfer of £107,310 from a recognised overseas pension scheme during 2023/24. His personal lifetime allowance will be 10% higher than the standard lifetime allowance (£107,310/£1,073,100). This recognises the fact that the transferred funds haven't received any tax advantages from HMRC.
An individual 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. In our example, John has until 31 January 2030 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.
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
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.