Following the Autumn Budget 2024, the UK Government unveiled significant reforms to the rules governing pension transfers to Qualifying Recognised Overseas Pension Schemes (QROPS).

The Overseas Transfer Charge (OTC) is a 25% tax on transfers to QROPS. Until now, transfers to QROPS in the EEA or Gibraltar were generally exempt from this charge, However, from 30 October 2024, this exemption will be removed.

The Government is closing this loophole to ensure UK pension transfers are treated equally, regardless of the destination country. This aims to prevent UK residents from benefiting from double tax-free allowances on pension savings.

Understanding the Overseas Transfer Charge (OTC) and Its Origins

The Overseas Transfer Charge (OTC) was introduced in 2017 to address concerns about individuals avoiding UK tax on their pension savings by transferring funds to overseas schemes. The OTC imposes a 25% tax charge on transfers to Qualifying Recognised Overseas Pension Schemes (QROPS), unless specific conditions are met at the time of transfer.

When was the OTC Exempt?

The OTC did not apply if any of the following conditions were satisfied:

1. Same Country Residency: The member was a resident of the country where the receiving QROPS was established.
2. EEA or Gibraltar Transfers: The QROPS was based in Gibraltar or an EEA country, and the member was either a UK resident or resident in another EEA country.
3. International Organisation Schemes: The QROPS was established by an international organisation to provide benefits for past service, and the member was an employee of that organisation.
4. Overseas Public Service Pension Schemes: The QROPS was a public service pension scheme for overseas employees, and the member worked for a participating employer.
5. Occupational Pension Schemes: The QROPS was an occupational scheme, and the member was an employee of the sponsoring employer.

Why Were EEA and Gibraltar Exclusions Originally Allowed?

The exemptions for QROPS in the EEA and Gibraltar were introduced to comply with European Union (EU) freedom of movement principles. At that time, it was essential to align pension transfer regulations with EU laws to ensure non-discriminatory treatment across member states.

Changes Following the Abolition of the Lifetime Allowance (LTA)

On 6 April 2024, the Lifetime Allowance (LTA) was abolished, and three new allowances were introduced:

1. Lump Sum Allowance
2. Lump Sum and Death Benefit Allowance
3. Overseas Transfer Allowance

The Overseas Transfer Allowance operates independently of the other two allowances. Under current pension tax legislation, the treatment of QROPS transfers and payments is clearly outlined. Specifically, when a lump sum is paid from a QROPS, it is assessed solely against the lump sum allowance for that particular QROPS. This has led to a situation where member transferring their pension to a QROPS in the EEA or Gibraltar could potentially benefit from multiple tax-free allowances.

Legacy of EU Freedom of Movement Principles

The original conditions that EEA schemes had to meet to qualify as Overseas Pension Schemes (OPS) or Recognised Overseas Pension Schemes (ROPS) were also based on EU freedom of movement rules. Similarly, the requirements for scheme administrators of registered pension schemes were designed to align with these principles, ensuring regulatory consistency within the EU.

Aligning the tax treatment of EEA and Gibraltar QROPS transfers with the rest of the world stops UK residents from taking advantage of multiple tax-free allowances.

By requiring EEA OPS and ROPS to meet the same conditions as non-EEA schemes, the Government ensures fairness and minimizes loopholes that could be exploited.

The upcoming changes to pension transfer rules represent a significant shift for overseas pension schemes.