Facts and analysis
Can a UK pension fund transfer overseas?
Your client’s UK pension funds are able to transfer to an overseas pension scheme subject to meeting certain conditions prescribed by HMRC.
- For the transfer to be recognised for UK tax purposes by HMRC, the receiving scheme must be a Qualifying Recognised Overseas Pension Scheme (QROPS).
A QROPS is a pension scheme established outside the UK that is broadly similar to a UK registered pension scheme. When registering as a QROPS, the scheme manager is required to confirm that pension funds transferred to the QROPS, which have benefited from the tax concessions available to UK registered pension schemes, will be used to provide retirement benefits roughly similar to those which would have been available from the transferring UK pension scheme.
- A transfer to an overseas scheme which is not a QROPS, or which has lost its QROPS status will be an unauthorised payment.
To avoid unintentionally making an unauthorised payment, the transferring UK scheme will usually request evidence to confirm that the intended receiving scheme is a QROPS and continues to meet the QROPS criteria, before the pension funds are transferred. The requirements of different pension schemes will vary, although this is likely to include a check that the scheme is present on the latest QROPS list published on the HMRC website, and a request for the unique QROPS reference number which will have been allocated to the QROPS scheme by HMRC. Some schemes may also request a copy of the QROPS acknowledgement letter also issued by HMRC. Although an overseas scheme may appear on the ROPS list HMRC cannot guarantee these are ROPS or that any transfers to them will be free of UK tax. It’s your client’s responsibility to find out if they have to pay tax on any transfer of pension savings.
- Some transfers to an overseas scheme which is a QROPS may be liable to a 25% "overseas transfer charge".
On 8 March 2017 HMRC changed the rules relating to transfers from UK registered pension schemes to Qualifying Recognised Overseas Pension Schemes (QROPS).
For some transfers a 25% tax charge has been introduced which the UK scheme is responsible for deducting, reporting and paying to HMRC before making the transfer payment. Even where the tax charge doesn’t apply on the initial transfer there are circumstances where it can apply at any point in time before the end of the fifth complete tax year following the transfer.Further guidance on this can be found on gov.uk and our article "Overseas - tax issues relating to pension transfers".
What is a ‘recognised’ transfer?
Generally, for an overseas transfer to be ‘recognised’ by HMRC the following rules apply:
1. The overseas scheme . . .
a. Must be a Qualifying Recognised Overseas Pension Scheme (QROPS):
- This means the receiving scheme will have notified HMRC that it meets their Qualifying Recognised Overseas Pension Scheme (QROPS) conditions, and has undertaken to comply with the HMRC reporting and administration requirements for transferred UK pension funds. If this notification is successful, HMRC will acknowledge the scheme’s QROPS status and allocate a unique QROPS reference number. The scheme must also undertake to inform HMRC if it ceases to meet the QROPS conditions in the future.
- To assist individuals with their selection of a suitable overseas pension scheme, HMRC maintain a list of current QROPS schemes on their website, containing the QROPS schemes which have consented to have their details published. Only the scheme name and country or territory in which it is established are published, the unique QROPS reference numbers are not shown. The list is usually updated by HMRC twice each month. Although an overseas scheme may appear on the ROPS list HMRC cannot guarantee these are ROPS or that any transfers to them will be free of UK tax. It’s your client’s responsibility to find out if they have to pay tax on any transfer of pension savings.
- A transfer to an overseas scheme which does not meet the HMRC QROPS conditions at that time will be an unauthorised payment with associated tax charges for both your client and the transferring scheme. For this reason it is unlikely that a UK registered pension scheme will provide an overseas transfer without first confirming that the receiving scheme is a QROPS.
- A transfer to a QROPS ensures that former UK pension funds, which have benefited from UK tax relief, are primarily used to provide retirement benefits for the member with a maximum of 30% of the fund capable of being released as a cash lump sum.
- If the QROPS makes payments from former UK funds which would not have been permitted under a UK registered pension scheme eg. a transfer to a non-QROPS or payment of an excess lump sum, this will be a ‘member chargeable payment’. The member payment charges are the same level as the unauthorised payment charge (40%) and surcharge (15%). These charges would be levied on the member regardless of where they are resident at the time the payment or transfer is made. In addition to tax charges for the member, the overseas scheme may lose its QROPS status, preventing acceptance of any further UK pension fund transfers.
b. Must be able to accept pension funds transferred directly from a UK pension scheme under the legislation of the country in which it is established
- Although an overseas scheme may have attained QROPS status, this is relevant for HMRC purposes only and does not mean receipt of a transfer from a UK pension scheme is acceptable to the overseas tax authorities. This means a UK pension provider may not be able to act on a request to transfer your client’s pension fund, even though the QROPS conditions may have been met by the intended receiving scheme.
- For example, HMRC have indicated that US ‘qualified’ retirement plans, including individual retirement arrangements (IRAs) may be unable to accept a transfer of UK pension funds.
QROPS notification forms
HMRC have provided a series of forms to be used by overseas pension scheme managers:
- APSS251 – ‘Notification to HM Revenue & Customs’ – scheme administrators will need to use this form to notify HMRC that their scheme meets the prescribed QROPS requirements.
- APSS251A – ‘Change of details’ – this form should be used to notify HMRC of any material changes to the scheme information previously provided.
- APSS251B – ‘Change in status and notification of fund value’ – scheme administrators will need to use this form to notify HMRC if their overseas pension scheme no longer meets the QROPS conditions, or they do not wish to remain a QROPS. In these cases, HMRC will need to be given the value of each member’s former UK pension funds at the date the scheme ceases to be treated as a QROPS.
These forms and further guidance to assist overseas pension scheme administrators are available from the HMRC website.
2. The member must be eligible to join the overseas scheme
- The member will need to meet any residency, employment or income requirements for membership of the receiving QROPS scheme.
- We have a look at some of the options which may be available to your overseas clients in a separate article: 'Overseas - Opportunities for personal pension members'.
3. The transfer must be a ‘recognised’ transfer for UK tax purposes
- This means the transfer must be made to a receiving overseas scheme which is able to evidence that it is a QROPS at the time the transfer is paid. If the scheme has not agreed to publication on the latest HMRC QROPS list, it will need to supply alternative evidence to confirm its current QROPS status. Evidence requirements will vary between providers and schemes.
Can both uncrystallised and crystallised funds transfer?
- If uncrystallised UK pension funds transfer
This will be a benefit crystallisation event (BCE 8), and your client will need to provide the transferring UK scheme with a lifetime allowance declaration. Excess funds may still transfer, although these would be subject to a 25% lifetime allowance excess tax charge before transfer.
- If crystallised drawdown UK pension funds transfer
To qualify as a recognised transfer the receiving QROPS will need to provide retirement benefits from the crystallised funds on a similar basis as those provided by the transferring arrangement.
So, if a capped drawdown fund transfers, the overseas scheme will need the following details:
- the pension year,
- reference period,
- basis amount, and
- any drawdown income already taken in the current pension year, before transfer.
The QROPS will also need to be aware of the Government Actuary’s Department (GAD) tables, as they will need to recalculate the basis amount before the next reference period starts.
If the QROPS is not able, or not prepared, to provide benefits on the same basis as the transferring drawdown plan, and payments exceed the UK permitted levels, the excess payments will mean that the plan has converted, by default, to flexi-access and the member will then be subject to the Money Purchase Annual Allowance of £10,000.
- If drawdown income was already in payment before 6 April 2006
No benefit crystallisation event (BCE 8) will occur if the transferring pension funds represent drawdown funds which were already in payment before 6 April 2006. This means no lifetime allowance test will be required.
- If the drawdown funds crystallised on or after 6 April 2006
If the transferring pension funds crystallised on or after 6 April 2006, they would have been subject to a benefit crystallisation event (BCE 1) when they originally crystallised and the ‘overlap provisions’ will apply.
- The overlap provisions
These allow for the amount originally crystallised and designated as a drawdown fund to be deducted from the transfer value now subject to a BCE 8. Any remaining amount will need to be tested against the member’s available lifetime allowance with any excess subject to a 25% tax charge before transfer. If the remaining amount is zero or negative, no further lifetime allowance test is required.
A transfer of UK pension funds to a QROPS will be recognised by HMRC and will be an authorised payment. Although a lifetime allowance excess tax charge may be payable, there are no other UK tax charges attached to a recognised transfer from a UK registered pension scheme apart from any scheme or arrangement specific charges eg. exit charges.
- Lifetime allowance
If your client transfers their UK pension fund to a QROPS, they will need to complete a lifetime allowance declaration before the transfer goes ahead – unless the transferring funds were already providing drawdown before 6 April 2006.
Any transfer funds which exceed your client’s available lifetime allowance will be subject to a 25% lifetime allowance excess tax charge before the funds may transfer. This charge will apply regardless of where your client is resident at that time.
A transfer to a scheme which is not a QROPS will not be recognised by HMRC, this means the transfer fund will not be assessed against the member’s available lifetime allowance. Instead the payment will be an unauthorised payment and subject to the associated (and higher) charges.
- Overseas transfer charge
The UK budget of 8 March 2017 changed the rules relating to transfers from UK registered pension schemes to Qualifying Recognised Overseas Pension Schemes (QROPS).
For some transfers a 25% tax charge has been introduced which the UK scheme is responsible for deducting, reporting and paying to HMRC before making the transfer payment. Even where the tax charge doesn’t apply on the initial transfer there are circumstances where it can apply at any point in time before the end of the fifth complete tax year following the transfer.
Further guidance on this can be found on gov.uk
- Unauthorised payments
If your client transfers to an overseas pension scheme which does not meet the HMRC criteria for a QROPS at that time, or has lost its QROPS status, the transfer will not be recognised by HMRC and will be an unauthorised payment with tax consequences on both your client and the UK scheme.
It is unlikely that a UK pension scheme will knowingly agree to a transfer which would give rise to an unauthorised payment. To reduce this risk, the UK scheme will usually ask for evidence to confirm that the receiving scheme is a valid QROPS at the time the transfer is made. Evidence requirements will vary between providers and schemes, although as a minimum this is likely to include a check that the scheme is present on the latest QROPS list published on the HMRC website, and a request for the unique QROPS reference number. Some schemes may also request a copy of the QROPS acknowledgement letter issued by HMRC.
We have considered some of the tax charges and reliefs your client may need to be aware of in a separate article: 'Overseas - Tax issues relating to pension transfers'.