Last Updated on 6th September 2024
Pension transfers are a common option for expats relocating from the UK to an overseas destination.
The regulations, taxes and impacts on your pension benefits can be complex and varied and will depend on aspects such as the structure and type of pension you hold, the country you are moving to, whether you are already drawing your pension, and the nature of the scheme you’d like to transfer your retirement assets to.
We would always suggest that seeking advice from a transfer specialist is important. Going it alone could mean making uninformed decisions, missing out on tax efficiencies, or exposing your pension to unnecessarily high taxation.
Regardless of the value of your pension, and whether you choose to leave your scheme in situ, switch to another structure or product, or transfer your pension overseas, there are both risks and opportunities.
Protecting your retirement income, complying with the domestic and overseas pension transfer rules, and understanding your tax liabilities are essential to a smooth process and safeguarding the value of your retirement funds.
Potential Taxes Incurred on an Expat Pension Transfer Outside of the UK
Most British expats with a UK pension fund choose to proactively restructure, transfer, or reinvest their retirement savings or investment products as part of an international move. While this may have benefits, such as reducing exposure to currency exchange risks, a pension transfer can also carry potential risks.
Tax liabilities are one such consideration because several potential charges could arise, especially if your pension transfer isn’t correctly managed.
There is also a caveat that if you transfer a pension fund abroad, it must be to a scheme recognised and approved by HMRC and included on the list of Recognised Overseas Pension Schemes (ROPS).
The UK tax authorities recognise overseas pensions only if they meet specific criteria, such as being regulated in the same country where the fund is based and recognised as a pension fund for tax purposes. Once a scheme is approved, this position is also subject to change, with regular updates to the HMRC published list.
Understanding the Overseas Transfer Charge
As an overview, the tax obligations that could arise include:
- The Overseas Transfer Charge (OTC) – a tax charged against pension transfers, depending on where the overseas scheme is located, your country of residence, and the value of your pension.
- Expats who live outside the UK, European Economic Area (EEA), or Gibraltar are liable to pay the 25% tax rate, although this is usually refundable within the next five years provided you have moved to the same country in which your ROPS is based.
- The UK pension regulations state that transfers of UK pension schemes to unrecognised overseas funds could be liable to a 40% transfer tax.
- The Overseas Transfer Allowance (OTA) has replaced the previous Lifetime Allowance (LTA). It states that most pension funds will attract a 25% transfer tax if they exceed £1.073 million—the same threshold as the LTA. However, some pension holders have a protected allowance that requires verification before making any decisions.
Expats considering transferring a pension to a scheme outside of the place where they will live, transferring funds of a substantial value, or looking at ways to avoid the 25% transfer tax benefit from professional, personalised guidance to ensure they understand their tax exposure, and how this will impact their retirement planning.
It is also necessary to review aspects like your access to a tax-free lump-sum drawdown, any exposure to UK income tax against your pension income, and variations in retirement ages between jurisdictions.
Retaining the Value of Your Pension Benefits Following a Cross-Border Transfer
Some pension schemes are ineligible for an overseas transfer, and the scheme provider will likely refuse any fund transfer request. These include:
- UK State Pension benefits: Most expats continue to claim the State Pension but may not receive an annual increase, depending on their place of residence.
- Some employer pension schemes, particularly those that have already been claimed against or that you are still making contributions into.
- Civil Service and Armed Forces pension funds, annuities you have purchased already, some council pension schemes, and pensions included in the Pension Protection Fund.
If it is possible to transfer your pension, you should also consider the benefits, any guaranteed returns, and how your access to your pension and entitlements might change after a relocation.
Employment, personal and private pension schemes have differing terms and allowances, and some funds, especially those with defined benefits, may reduce considerably in value if you opt to sacrifice guaranteed lifetime income – a transfer may not be advisable in this scenario.
Experienced pension advisers with a thorough understanding of the pension regulations and rules in both the UK and your new place of residence will also analyse other factors, such as claimable lump-sums, how a pension fund will be invested, the taxes arising on lump-sum and regular benefits, and whether a double taxation agreement will come into play.
Making Informed Pension Transfer Options as an Overseas Expat
Although there are several pension transfer benefits, expats with funds likely to attract a transfer charge, significant tax liabilities overseas, or that will fall in value following a transfer can consider alternative strategies.
Options like a Self-Invested Personal Pension (SIPP) enable you to access tax efficiencies similar to those available through most ROPS, although without transferring your pension outside the UK.
While our recommendations will depend on multiple variables, SIPPs can provide a balance of flexibility, access to your pension from overseas, and the removal or mitigation of your tax obligations.
In other circumstances, where you are relocating to a country that offers a beneficial tax treatment for incomes from overseas or has a flat-rate pension income tax system, your decision-making may differ to ensure you take full advantage of the opportunity to lower your long-term tax liabilities against pension benefits.
This information demonstrates the complexities, contributing factors, and taxation aspects to consider before making any firm decisions and why professional, specialist pension transfer advice is key to protecting your pension value and financial security as an international expat.
*Information correct as at August 2024