When a client wants to take their pension overseas with them, it can be far from a simple process. Martin Jones, Technical Manager at AJ Bell offers some technical guidance.
If a client is looking to move to a new country, whether retiring overseas or returning to their home country after working in the UK, they may want to take their pension with them.
As you might expect, there are more hurdles to clear than with UK transfers, and you may need to guide your clients through the process.
Here I set out three key points to be aware of when advising clients who are transferring their pensions overseas.
Qualifying Recognised Overseas Pension Scheme (QROPS)
For a pension transfer overseas to be an authorised payment under UK pensions legislation, the receiving scheme must satisfy the conditions of being a Qualifying Recognised Overseas Pension Scheme (QROPS).
It’s important to note that a QROPS is not a type of pension scheme itself – it’s a pension scheme in another country that broadly works in a similar way to a UK scheme and meets certain conditions.
HMRC publishes a list of overseas schemes whose administrators have notified it that their schemes meet the conditions of being a Recognised Overseas Pension Scheme (ROPS).
For a ROPS to be considered a QROPS, there are further conditions around notifications and undertakings, which may or may not be in place at the point of transfer. For this reason, the HMRC list cannot be considered definitive (and HMRC doesn’t intend it to be).
Therefore, it’s important to be aware that the transferring provider may want to conduct due diligence to check that the receiving scheme satisfies the conditions.
This could include asking for a copy of the scheme’s trust deed and the HMRC letter of acknowledgement of QROPS notification. They may also have their own money laundering checks to do before they send the payment.
DWP transfer regulations
Thanks to regulations introduced in 2021 by the Department for Work and Pensions (DWP), UK providers must now check for certain amber flags and red flags as determined in those regulations before they can be satisfied the client has a statutory right to transfer.
If they aren’t satisfied there is a statutory right, they can require the client to seek safeguarding guidance from MoneyHelper, which is an impartial, government-backed service.
If your client is looking to transfer their pension to an occupational pension scheme in their new country, the UK provider will need to establish that they are employed by the company connected to the scheme.
To do this, they will ask for evidence of employment including a letter from the employer, a schedule of contributions, payslips for three months and copies of bank statements showing the salary coming into the account.
If your client is transferring to a personal pension, the UK transferring provider may ask for evidence to confirm your client’s residency in the new country. Evidence will vary but can include utility bills, an overseas driving licence and bank statements.
This could feel onerous to clients if they aren’t expecting it, so it may pay to set expectations at the beginning of the process. While it seems irrational and unnecessary for an advised client to visit a guidance service, this is how the regulations are written, and providers are unlikely to deviate from them.
Overseas transfer charge (OTC)
In 2017, the government introduced the Overseas Transfer Charge (OTC).
This is a flat charge of 25% on the value of the transfer. It’s levied unless one of several exemptions applies. The most notable exemption is that the client is resident in the same country as the receiving pension scheme.
The other exceptions relate to employment. If one of those might apply, you may need to speak to the UK provider to see what they require in terms of evidence.
It’s possible there will be some crossover with the evidence required under the DWP regulations, but it’s not guaranteed.
There is also a second angle to the OTC.
Following the abolition of the lifetime allowance on 6 April 2024, and the introduction of the Overseas Transfer Allowance (OTA) as one of three allowances in its place, the OTC may also apply on transfers that exceed the client’s OTA.
A client’s OTA is set at the same amount as their initial Lump Sum and Death Benefit Allowance (LSDBA), so for most clients this means it’s £1,073,100. Those with forms of protection may have different amounts.
If a client has taken a tax-free lump sum from a UK pension scheme on or after 6 April 2024, it will not reduce the OTA.
However, if they used any lifetime allowance before that date, then depending on the type of benefit crystallisation event, it may reduce their available OTA, and there is a one-off transitional calculation to do.
Any other QROPS transfers on or after 6 April 2024 will also have used up OTA.
Note that if the OTC is already due because the client resides in a different country to the pension scheme, there will not be an additional charge levied due to insufficient OTA.
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