More and more people are relocating for work or retirement. As a result, individuals moving overseas often prefer to transfer their UK pension benefits rather than leaving them in the UK. Likewise, those moving to the UK might want to bring their overseas pension benefits with them. Understanding the impact of such transfers is crucial.

Criteria and Process for Transferring Pension Benefits Overseas

To avoid an unauthorised payment and the associated tax charges, transfers must be made to a Qualifying Recognised Overseas Pension Scheme (QROPS). Therefore, confirming the receiving scheme’s QROPS status is essential.

Overseas Transfer Charge Explained

Since March 9, 2017, all transfers to QROPS have been assessed to determine if an overseas transfer charge applies. This charge aims to discourage transfers and retain pension wealth within the UK. The charge still exists under the new rules and can now be triggered in two ways. The first test remains unchanged: there are five conditions, and if any are met, no charge is applied.

1. The member is resident in the same country in which the QROPS receiving the transfer is established.
2. The member 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*.
3. The QROPS is set up by an international organisation to provide benefits in respect of past service as an employee and the member is an employee of that organisation.
4. The QROPS is an overseas public service pension scheme and the member is an employee of an employer who participates in that scheme.
5. The QROPS is an occupational scheme and the member is an employee of a sponsoring employer of the scheme.

These conditions include the member being resident in the same country as the QROPS, or within the UK, Gibraltar, or the EEA if the QROPS is in the same jurisdiction. Other conditions apply to international organisations, public service pension schemes, and occupational schemes when the member is employed by a sponsoring employer.

The Impact of LTA Changes on QROPS Transfers

Recent changes to the UK’s Lifetime Allowance (LTA) have led to significant shifts in pension planning, particularly affecting transfers to Qualifying Recognised Overseas Pension Schemes (QROPS). With the LTA effectively abolished, this has created both opportunities and challenges for those with substantial pension pots. But with the LTA now abolished, the rush for transfers has subsided, though there will still be demand for QROPS transfers, albeit with new technical considerations. Understanding these changes will help clients retire abroad without unexpected complications.

Importantly, transfers to QROPS are only tested against the overseas transfer allowance and do not reduce the member’s lump sum allowance or LSDBA, preserving tax-free cash options for any remaining UK pension rights. By keeping these new regulations in mind, UK expats can maximise the benefits of QROPS transfers and enjoy retirement abroad with greater financial confidence.

Introducing the Overseas Transfer Allowance

From April 6, 2024, three new limits have replaced the LTA: the lump sum allowance (LSA), the lump sum and death benefits allowance (LSDBA), and the overseas transfer allowance (OTC). The overseas transfer allowance is particularly significant for QROPS transfers, as it limits how much can be transferred before a tax charge applies, similar to the old LTA regime.

An essential aspect of the post-LTA landscape is the introduction of a new overseas transfer allowance. This allowance essentially acts as a limit on tax-free transfers to overseas pensions. The overseas transfer allowance is currently capped at £1.0731 million—the last value of the LTA before its removal. If the value of your pension exceeds this amount when transferring to a QROPS, you could face a 25% Overseas Transfer Charge on the excess.

For example, if you transfer £1.5 million to a QROPS (and you have no protection in place), the portion above £1.0731 million (i.e., £426,900) will incur a 25% tax, amounting to £106,725. The introduction of the Overseas Transfer Allowance and its corresponding charges means that those with large pension pots must carefully evaluate whether a QROPS transfer is still the best move. Additionally, an overseas transfer charge may apply unless one of the specified exclusions is met. It’s also important to check if local tax charges will apply in the receiving territory.

Historically, transferring pensions over the LTA threshold to QROPS allowed individuals to avoid a 25% tax charge on amounts exceeding the LTA. However, with the LTA’s removal, the motivation for such transfers has evolved. Investors must now consider the remaining advantages of QROPS, such as currency flexibility, potential local tax advantages, and greater control over retirement benefits.

Is a QROPS Still Right for You?

With the LTA now removed, the decision to transfer to a QROPS is more nuanced. While the primary motivation of avoiding LTA charges is no longer relevant, QROPS can still provide several benefits, including currency flexibility, tax efficiency, and greater control over retirement income. To make an informed decision, it’s important to consider the costs and tax implications of transferring, including potential charges resulting from exceeding the Overseas Transfer Allowance.

Final Thoughts

The abolition of the LTA has transformed the pension landscape for expats, requiring a fresh perspective on retirement planning strategies. The introduction of the Overseas Transfer Allowance, LSA, and LSDBA means that QROPS transfers need to be approached with caution and foresight. Understanding where tax charges may occur and how these new allowances affect contributions and withdrawals is crucial for maximising the benefits of your retirement savings.

If you’re considering a QROPS or want to understand how the latest LTA changes could affect your retirement planning, consulting with a financial planner who understands both UK and overseas pension landscapes is essential. Get in touch for personalised advice tailored to your circumstances.