Ever since UK Chancellor Philip Hammond announced, in his spring Budget on 8 March, that a new 25% charge, taking effect the next day, would be levied on most overseas pension transfers, there’ve been no shortage of predictions of the virtual end of the pension transfer market – and with it, the livelihoods of many expatriate advisers (including, as was the intention, those of countless scammers).
But given the lack of prior notice, and continued lack of clarity, even many reputable firms are having to re-visit their business plans, as they contemplate a 2017 with less income than they had been counting on, International Investment understands.
Darion Pohl, one of the founders and chief executive of London-based Prism Xpat, which helps expats going to and from Australia, where he’s from, is among those with questions he says need to be answered, and who think that the UK regulator may need to give certain elements of the new rules a little more thought.
But he’s also adamant that the market for UK pension transfers to Australia is, and will remain, open. Below, he explains why.
In most cases, an Australia tax resident individual wishing to transfer their UK pension to Australia will need to make use of what is called a qualifying recognised overseas pension scheme (QROPS), already set up in Australia. (Recently HM Revenue & Customs has occasionally been referring to them as simply ROPS.) A list of such schemes may be seen on HMRC’s website.
As of 9 March, there is now an extra requirement to ensure that the QROPS in Australia complies with HMRC guidelines, with extra paperwork to be completed and submitted.
For anyone who has an existing QROPS, the deadline is 13 April 2017, after which the person’s current QROPS may be de-registered if the paperwork is not submitted in time.
The main change introduced by the UK spring budget 2017 was the announcement of a 25% transfer tax, which would apply to any pension transferred from the UK to Australia, or any other third country, under certain conditions.
One of these key conditions is that the resident needs to be resident in the same country as the one to which their pension has been transferred. If not the case, since 9 March under the new rules, a transfer tax of 25% would be applied, based on the value of the amount transferred.
This transfer tax would continue to apply if the person changed their residence within the following five years. For example, if an Australian tax resident had their pension transferred to QROPS in Australia – and then a few years later decided to return to live in the UK or another jurisdiction, and became tax resident there – the 25% transfer tax would be levied at the time the person moves to the third country.
For people such as an Australian businessman living in a third country (i.e., not Australia and not the UK) who intends to return to Australia in a few years’ time, it may now be best to either 1) wait until the businessman has returned to Australia, with the intention of staying long term, before setting up a QROPS in Australia and having his funds transferred; or 2) it would be worth the businessmen having his UK pension scheme reviewed in the near term, as there are some excellent valuations being offered by pension schemes in the UK at present, which he may wish to lock in, and then have invested in the UK for future transfer.
Such matters, of course, would need to take into account the businessman’s personal circumstances and plans, while considering each of the jurisdictions separately, in order that the correct advice can be provided.
An additional option would be for the individual to retain their pension in the UK, and make withdrawals from it, over time from the UK, in line with UK and Australian pension withdrawal rules. This option, too, would need to be properly considered in line with the pension member’s tax residence status and plans over time, as well as relative to the alternatives.
In conclusion, therefore, it’s our belief at Prism Xpat that the UK’s new overseas pension transfer rules and resultant change in process, while still workable and designed to ensure that the pensions are used for the purpose intended, may need further thought by the UK regulator.
Difficulties currently arise, for example, when a person who moved to Australia with the intention of staying long term subsequently decides that they wish to return to live in the UK – typically for work or family reasons. We believe that where a legitimate reason for such a change of mind exists, the pension scheme member should not be penalised.
The inflexibility of the current regulations also make it difficult for people who plan to live in different countries in their retirement to plan for this, as they are obliged to choose as the destination for their pensions a jurisdiction that may not be the best one for them in another 10 or 15 years’ time, even though it might be now.
The bottom line, which hasn’t really changed since the Chancellor’s speech earlier this month, is this: The decision as to whether the UK pension of an individual who is relocating to Australia from Britain – be they Australian or British nationals – should be transferred to Australia or kept in the UK must be determined on a case-by-case basis, with the help of knowledgeable professionals.
Darion Pohl is one of the founders and chief executive of London-based Prism Xpat, which helps expats going to and from Australia. He was interviewed in a cover story about Prism Xpat in the October issue of International Investment magazine. This article is intended for general information only, and is not intended as specific advice.