Amongst all the changes to the LTA regime, the overseas transfer allowance is one that may have flown under the radar but needs attention if clients are not to be caught out. The Brand Financial Training technical team explain the situation now.
The last year and a half has been an interesting one in the pensions world to say the least. From the abolition of the lifetime allowance and the political bickering that followed to the introduction of the replacement lump sum allowance (LSA), lump sum and death benefits allowance (LSDBA)and transitional tax-free amount certificate (TTFAC). It’s been an interesting time alright.
One factor which has flown relatively under the radar is the introduction of the new overseas transfer allowance (OTA). Introduced at the same time as the LSA and LSDBA, it is a limit on the amount that the member can transfer to overseas pension schemes during their lifetime without incurring a tax charge. This is in recognition of the old BCE 8, which limited the amounts that a member could transfer overseas without incurring a lifetime allowance excess tax charge.
The overseas transfer allowance is the same as the member’s previous lifetime allowance, which means that it is £1,073,100 for most people, albeit higher for those who previously benefitted from lifetime allowance protection. Whilst subject to its own limit, such a transfer does not impact on the member’s LSA or LSDBA. Any excess will be subject to a tax charge at a flat rate of 25%, which is known as the overseas transfer charge.
However, there is a catch, which is that not all such transfers are actually eligible. In order to benefit from the allowance, the transfer must be to a qualifying recognised overseas pension scheme (QROPS) and the scheme must meet one of a limited number of eligibility criteria. These are, in summary, that the scheme is
- established in the same country as the member making the transfer is resident; or
- established in Gibraltar or a country within European Economic Area (EEA) and the member is UK resident or resident in a country within the EEA or Gibraltar; or
- an occupational pension scheme and the member is an employee of a sponsoring employer under the scheme;
- an overseas public service scheme and the member is employed by an employer that participates in that scheme; or
- a pension scheme of an international organisation and the individual is employed by that organisation
Such transfers are known as ‘excluded transfers’ and are free of a UK tax charge. Any non-excluded transfer will be subject to the 25% tax charge without being eligible for the overseas transfer allowance. Where the transfer charge is applicable then the individual and the scheme administrator are jointly and severally liable. Hence, scheme administrators are clearly required to be diligent in ensuring that the proposed transfer is to a scheme which complies with the rules. Interestingly, the rules apply equally to nominee’s or successor’s flexi-access drawdown plans. Overseas pension schemes are required to confirm to HMRC every five years that they continue to meet the requirements to be treated as a QROPS.
To complicate matters further, another nasty little catch is that the charge can be applied retrospectively. If the charge does not apply on the original transfer, but the member subsequently transfers to another scheme which does not meet the criteria within five years of the original transfer then the transfer charge will become payable.
Likewise, should the member’s circumstances change, for example should they change their residency to a country other than the one the scheme is located in. To confuse matters further, a charge which has already been paid may become refundable if the member’s circumstances change sufficiently that their arrangements subsequently meet the requirements.
Transferring to a scheme that does not meet the eligibility criteria is not a can of worms that anybody wants to open. The member tax charges are levied at the same level as an unauthorised payments tax charge at 40%. In addition, where the unauthorised payment exceeds 25% of the value of the member’s pension rights then an unauthorised payment surcharge of 15% will also be payable, exacerbating the situation further.
The registered pension scheme would have to pay the scheme sanction charge up to a maximum of 40% of the transfer value.
With all these complexities, it’s no wonder most firms elect to stick with their bread-and-butter financial planning. But QROPS transfers have come up on a regular basis in the CII’s R04 exam previously and the overseas transfer allowance will be key knowledge for those sitting the exam going forward.
About Brand Financial Training
Brand Financial Training provides a variety of immediately accessible free and paid learning resources to help candidates pass their CII exams. Their resource range ensures there is something that suits every style of learning including mock papers, calculation workbooks, videos, audio masterclasses, study notes and more. Visit Brand Financial Training at https://brandft.co.uk
Main image: muhammad-afnani-o5zeFu6gREM-unsplash
