A recent legislative change could have unexpected consequences for clients with overseas pension arrangements. Mark Devlin, Senior Technical Manager at M&G, highlights a little-noticed update to the pension tax rules and explains why paraplanners may need to pay closer attention to the order in which benefits are taken.
Ok, relax everyone, I am not starting a political career here, and that’s as close to politics as I like to get. But hopefully I’ve grabbed your attention as there was recently a Statutory Instrument (SI) that came into force on 25 June which could have an impact on planning for some clients.
It may be a bit niche, but in the niche is where things can tend to go wrong, so it’s maybe one to keep in the back of your mind in case you happen across them.
I’ll do a brief summary on what this statutory instrument has changed, and highlight the biggest change.
The SI in question is SI2026/698, and a lot of the contents of this were to tidy up some errors in the legislation.
Things like if multiple benefits are put through relevant benefit crystallisation events on the same day, the member can now specify the order in which these are taken (much like the old Lifetime Allowance (LTA) rules).
There was also a tidy up in the formulae for people with enhanced protection to ensure that if they also had protected tax free cash from before the LTA came into being that the maths works correctly now.
The age 75 disregard and overseas transfer allowance for benefits used under the LTA regime has been tidied up.
It’s now using the percentage amount, rather than monetary amounts, which seemed to be the general intention of the legislation (although it’s still got issues for those that had LTA protection).
These were all expected amendments, but the changes to taking benefits from overseas pension schemes came a little out of left field.
This is where there is now a danger from overseas pension schemes which can affect a clients ability to take tax free amounts from UK pension benefits.
This will apply to overseas pensions that have benefitted from UK tax relief, commonly this will be where a UK pension has been transferred overseas, or if contributions by or on behalf of the member of the overseas scheme benefitted from UK tax relief.
When the LTA was abolished that one allowance was replaced by three allowances. The Overseas Transfer Allowance (OTA) did not interact with the LSA and LSDBA at all. Whereas under the LTA rules a transfer overseas used up LTA.
This left the potential for “double bubble” for those with large pension pots, they could use their OTA, send the money to an overseas scheme, take their tax free amount, and if they wanted to transfer the crystallised pot back to the UK.
They could do all this sat on their sofa in the UK as transfers to EEA regions and Gibraltar were ok to avoid a overseas transfer charge. You’d then still have the ability to use up your LSA and LSDBA in the UK.
The rules tightened in the autumn budget of 2024. The OTC applied to transfers where the member was not moving to the country where the pension was transferred to. Meaning if they didn’t move with the pension they would lose 25% on all that was transferred.
This window to get two tax free lump sums while living in the UK was short lived and effectively ceased for all transfers on or after October the 30th that year.
The only way to do this from then would be to move abroad and transfer your pension with you and take some UK benefits before or after you go.
But this new SI has created a link now between taking benefits based overseas and the availability to have a Relevant BCE in this country.
With effect from the 29th of June 2026 taking the equivalent of an RBCE (such as tax free cash or an UFPLS) overseas will now reduce the availability of the LSA and LSDBA for UK benefits.
This could further restrict things for UK based individuals with an overseas pension. The order of taking benefits will be crucial. Clients may want to consider taking UK based schemes first to retain the equivalent RBCE benefits abroad.
As I said, it’s maybe a bit niche, but certainly one that you will need to keep an eye out for if you happen to come across those who have overseas pensions.
Main image: globe, steps., kaleb-simanton-Jx56RHRimn4-unsplash
