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Changes to Tax on Short Service Refunds for UK Occupational Pension Members

Wednesday, January 20th, 2010

In the pre Budget Report, changes were announced (on 9th December 2009) to the tax that is charged when an individual leaves an occupational pension scheme within 2 years of joining and takes a refund of their contributions.

Global QROPS Ltd will explain the impact to UK occupational pension scheme members in this position and if there is any QROPS advice that may be affected by this.

What is a Short Service Refund?

Lump sums paid to members who leave an occupational pension schemes within 2 years of joining (known as short service refund lump sums), are permitted by the UK’s HMRC (Her Majesty’s Revenue and Customs) in order to ease the administrative burden for a scheme and reduce the cost of providing an extremely small pension for life for a member.

 The pre Budget Report declared that changes are being made to take into consideration the new 50% upper rate of income tax – coming into force from April 2011.

Short service refund lump sums, made on or after 6 April 2010, will now be taxed at a rate of 20% on the first £20,000 of the refund and 50% on the remainder. (Previously this was 20% on the first £10,800 and 40% on the amount above this).

For potential migrants, taking QROPS advice, there may be little option but to take the refund. Occupational scheme administrators will not always provide a transfer value for members with less than 2 years membership and therefore a transfer to QROPS may not be an option.

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UK Pre Budget Report 2009 – Tax Changes Affecting Annual Allowance

Sunday, January 17th, 2010

There are many circumstances, when a potential UK migrant is looking to transfer their UK pension funds to QROPS (Qualifying Recognized Overseas Pension Schemes) where it may be beneficial to boost their UK pension funds by making contributions first.

This would not only increase the transfer value, by the amount of contribution, but there is tax relief available on the contributions too.
Pre Budget Report Announcement Affecting Potential QROPS Clients

Already, for high earners looking to make fully tax relievable pension contributions, to a UK pension scheme, the new rules that were introduced in the Finance Act 2009 have a limiting affect on the amount that can be contributed above £20,000 per annum that would receive higher rate tax relief.

From April 2011, those with income of £180,000 and above would only receive basic rate tax relief on pension contributions. Those with income between £150,000 and £180,000 would get tax relief somewhere between basic rate and higher rate on a sliding scale.

However, the Pre Budget report has determined that the definition of relevant income (used in determining whether an individual is affected by these changes) will include employer pension contributions therefore affecting those with incomes of £130,000 per annum upwards (rather than from £150,000 upwards).

(However, the Government has said that those with incomes of £130,000 or less before the  inclusion of employer pension contributions will not be affected).

High earners looking for QROPS advice should, therefore, speak to UK QROPS advice specialists (such as Global QROPS Ltd) before making decisions on increased contributions to UK pensions.

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UK Expat Pension Members in Retirement

Thursday, January 14th, 2010

There are many UK expats that are currently working overseas for foreign companies or for the overseas arm of a UK company. For the majority of these people the original intention would be to earn a living abroad but return to the UK to retire, however, recent surveys have shown that this is no longer necessarily the case.

Due to the increasing cost of retirement in the UK and the taxable nature of UK expat pension member’s retirement income in the UK, an increasing number of expats that are working abroad are choosing to remain abroad in retirement. For UK expat pension members (ie members of UK pension schemes that are living abroad), overseas pension transfer advice is required to assess whether their funds should remain in the UK or transfer to a QROPS (Qualifying Recognised Overseas Pension Scheme).

The surveys have shown that 60% of expats abroad retire in Europe (with France and Spain being the most popular destinations), with the purpose of being close to their family. For other expats, the USA, Canada, Australia and New Zealand are the popular destinations – largely because they are English speaking countries. Wherever an individual retires overseas, though, they have to weigh up the better climate and quality of living against issues such as the standard of health care, emergency services and the tax system of their new country.

When funding for retirement, recent statistics have shown that expats look at their savings as the highest source of retirement funding with 27% coming from this source. The other major sources of retirement funding include the UK State Pension (23%), private pensions (20%) and rental income from property (6%).

What is surprising is that private expat pension funds makes up only 20% of retirement benefits. There may be QROPS options available that could increase pension provision for a UK expat pension member.

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UK Expat Pension Members Decide to Retire Overseas

Monday, January 11th, 2010

According to a recent study, conducted by a prominent financial institution in the Isle of Man, UK expats that have taken up positions in employment overseas – throughout their working life – are deciding to stay abroad in their retirement rather than return to the UK.

The main reason cited for remaining abroad, throughout retirement, is the cost of retiring in the UK is perceived to be too high. Indeed, the figures in the study suggested that £400,000 was the minimum level of wealth needed in the UK for a successful retirement.

Given this situation, what are the options for UK expat pension members that have accrued benefits in UK pension schemes, as well as benefits in their foreign employment schemes?

One of the main disadvantages of UK pensions, for UK expat pension members, is that the income from a scheme (either in the form of an annuity or drawdown) is assessable for tax in the UK – should the member return to the UK in retirement.

Tax on retirement income is not applicable from every type of scheme for every jurisdiction or country in the world, however, which can give a UK expat pension member the choice of overseas pension scheme to transfer their UK funds to – providing it is a QROPS (Qualifying Recognised Overseas Pension Scheme).

If an individual has retired to country that is a tax haven, such as the United Arab Emirates, or to a country that does not tax pension income from their own pension schemes (such as Australia and New Zealand), a transfer to an appropriate QROPS could lead to a tax free retirement abroad – which can appeal more to an individual than retirement in the UK.

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QROPS and In-specie Transfers

Friday, January 8th, 2010

Like any UK registered pensions scheme, Qualifying Recognized Overseas Pension Schemes (QROPS) have rules and regulations regarding permitted investments.

For many UK expat pension members, pension funds are often left in the UK because of the nature of the investment within the pension scheme. For example, UK Small Self Administered Schemes (SSASs) and UK Self Invested Personal Pension Plans (SIPPS) can have more diverse investments than a UK personal pension or standard employer’s scheme could have.

It would not be uncommon for a SSAS or a SIPP to have commercial property or shareholdings as an investment within the scheme. UK expat pension members with these types of schemes and investments may be deterred from transferring out of their UK scheme to a QROPS because it may require the investment to be cashed in first and, with the property or equity market at a low, this could lead to an overall loss for the fund.

What is an in-specie transfer to a QROPS?

In-specie transfers could be an alternative solution to divesting a pension investment in order to affect a transfer. Under this method, assets are transferred directly from one pension scheme to another. This means that any legal ownership of the assets, such as property, can be transferred from the transferring pension scheme to the receiving pension scheme.

Theoretically, at least, the same principle can apply for transfers from UK pension schemes to QROPS – however, additional points need to be considered. 

As you would be dealing with a different jurisdiction for QROPS, would that particular regime allow investments such as property or shares? Furthermore, would those types of investments receive the same tax breaks in overseas schemes as they would in the UK?

Global QROPS Ltd can provide advice and guidance on QROPS matters.

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UK Lifetime Allowance’s Effect on a Pension Transfer to Australia

Saturday, January 2nd, 2010

For some people that are looking at a pension transfer to Australia – to an Australian scheme approved by the UK’s Her Majesty’s Revenue and Customs (HMRC) as a QROPS – the UK Lifetime Allowance could have a bearing on the advice that they receive.
The UK Lifetime Allowance was introduced on 6th April 2006 (at the same time as QROPS) and basically was a limit set on a UK pension fund, that could receive tax benefits, when the pension either came into payment (through tax free cash, annuity or drawdown) or was transferred overseas. These payment or transfer events were known as Benefit Crystallization Events (BCEs).
The main concern for an individual, who is thinking about a pension transfer to Australia, is the Australian contribution cap limiting funds being transferred into Australia from the ATO (Australian Tax Office) legislation. However, for those individuals that have accumulated the larger pension funds, the UK Lifetime allowance could also pose a tax problem.
The UK Lifetime Allowance was set at £1,500,000 for pension funds in tax year 2006/07 and was to increase each year as follows: £1,600,000 in tax year 2007/08; £1,650,000 in tax year 2008/09; £1,750,000 in tax year 2009/10 and £1,800,000 in tax year 2010/11 and for the 5 immediate tax years thereafter.
For those with funds already in access of the Lifetime Allowance as at 6th April 2006, HMRC allowed those funds to be protected (providing the member applied for the protection) however, for those people that are not eligible for protection, above the lifetime allowance and looking to transfer to Australia and other overseas jurisdictions, UK tax penalties apply to excess of the transferred funds above the Lifetime Allowance for that UK tax year.
For example, if an individual that migrated to Australia, with funds in excess of the UK Lifetime Allowance, completed a pension transfer to Australia of A$450,000 with part of the fund and the rest to other overseas QROPS, any amount over above the allowance would be taxed at 55% (as a lump sum).

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Pension Transfer to Australia – Can I contribute to my UK scheme from Australia?

Thursday, December 31st, 2009

Often an individual, who is migrating to Australia, will contribute to their UK pension pre-migration – taking advantage of the UK tax relief on contributions – and then they would affect a pension transfer to Australia at a later date in order to take advantage of the Australian QROPS  tax benefits in retirement, in Australia.

As is the case on so many occasions, with the cost of migration increasing, most people do not have the spare funds to contribute to a UK pension pre migration – no matter what the tax breaks may be. This results in a UK pension transfer to Australia being completed without maximum advantage taken from UK tax relief.

For an individual already in Australia, whose proposed UK pension transfer to Australia is not underway, there may still be an opportunity to contribute to the UK pension.

If an individual is deemed to be a relevant individual ie has relevant earnings chargeable to UK tax in that tax year, is a crown servant abroad with earnings subject to UK tax (a diplomat or soldier, for example) or has been resident in the UK in that tax year (or any of the previous 5 tax years) – a contribution could be made to an existing UK pension.

Global QROPS Ltd would like to point out, however, even if the pension member is a ‘relevant individual’ it would still depend on the pension member’s provider as to whether the individual could still contribute. If the relevant individual has no UK earnings, the likelihood is that the UK tax relief on contribution would be restricted to £3,600 per annum (should the UK provider allow the contribution).

Pension members, migrating to Australia, should take advice from Global QROPS Ltd before regarding their additional contribution options.

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Can my Child’s Pension Transfer to a QROPS?

Monday, December 28th, 2009

From 6th April 2006, just about anyone with a UK pension can transfer to an overseas pension scheme – providing, of course, the overseas scheme is an approved QROPS (Qualifying Recognized Overseas Pension Scheme).

Since the Defined Contribution regime was introduced in the Finance Act 2000, an individual could make a UK pension contribution, on behalf of another individual, from 6th April 2001. These were known as Third Party contributions.

Also introduced in 2001 was the removal of the minimum age that an individual needed to be to become a member of a UK personal pension (or stakeholder).

Often taking advantage of these rules were grandparents or parents looking to make a contribution on behalf of a child. As a result, since 2001, there are many minors who have accrued pension funds.

It is often the case, that when a family migrates, all family members (including the children) would have accrued pension funds in the UK. Therefore, when Global QROPS Ltd are asked to advise about UK pension transfers to QROPS, the question arises about whether a child’s pension plan can transfer to a QROPS?

Theoretically, the answer to this question is ‘yes’. Her Majesty’s Revenue and Customs (HMRC) have not applied any restrictions on such a transfer (providing the receiving scheme is QROPS). However, there are plenty of considerations first.

For example, do overseas pension schemes have their own minimum age restrictions for pension membership? Is there value for the UK fund in being transferred to a QROPS (now or in the future)? – The answer to this could depend on factors such as the overseas pension scheme charges or the fund size.

Global QROPS Ltd are able to provide advice on all aspects of overseas pension transfers.

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UK Pension Transfers to New Zealand QROPS – Tax rates

Friday, December 25th, 2009

People that consider migrating (or returning) to New Zealand from the UK, who are members of UK personal or employer sponsored pension schemes, often speak to Global QROPS Ltd regarding the best retirement planning advice regarding their pensions.

For all members of UK pension schemes, the QROPS (Qualifying Recognized Overseas Pension Scheme) transfer option is available.

If you transfer your UK personal or employer pension to a New Zealand QROPS, and you are a resident of New Zealand at retirement, those benefits would be paid to you tax free.

What happens, however, if you are resident of New Zealand and decide not to exercise the QROPS option and take your retirement benefits directly from a UK scheme?

If you are not entitled to the ‘new or returning resident’s tax exemption’ in New Zealand, (or the exemption period has expired) any payments made from a UK scheme would be taxed at a New Zealand resident’s highest marginal rate.

The basic tax rates in New Zealand (for tax year 2009/10) are banded as follows:

0 – NZ$14,000 @ 12.5%
NZ$14,001 – NZ$48,000 @ 21%
NZ$48,001 – NZ$70,000 @ 33%
NZ$70,000 and over @ 38%

If you are considering a move to New Zealand and you are thinking about taking retirement benefits directly from your UK scheme, you should speak to Global QROPS Ltd first. If you take your benefits in the form of an annuity or final salary pension, you can not transfer your benefits to a New Zealand QROPS and you would have lost the option to receive your pension benefits tax free.

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QROPS advice – a UK Pension Transfer to Australia and the Tax Rates

Tuesday, December 22nd, 2009

When migrating from the UK to Australia many individuals, that have accrued UK pension funds, take advice on a UK pension transfer to Australia – to transfer into an Australian QROPS (Qualifying Recognized Overseas Pension Scheme).

The benefits of a transfer to an Australian QROPS, from a UK scheme, is that at age 60 all payments from the Australian QROPS scheme in respect of the transfer, made to the member, are paid fax free.

If you migrate to Australia and do not transfer your pension to an Australian QROPS, then your private or company pension benefits would be paid to you directly from the UK scheme at retirement. Any permanent resident of Australia would be taxed at their highest marginal rate on this income (whether the income is received by them in Australia or not).

These rates, for tax year 2009/2010, are banded as follows:

A$1 to A$6,000               NIL
A$6,001 to A$35,000      15%
A$35,001 to A$80,000    30%
A$80,001 to A$180,000  38%
A$180,000 and over        45%

(The above rates do not include the Medicare Levy of 1.5%)

The tax year in Australia runs from 1 July to 30th June and the above rates would be subject to change on 30th June 2010.

Permanent residents of Australia with UK pension benefits, that are coming up to retirement, should consider a UK pension transfer to Australia – if they have not done so already – as a way of reducing the tax that they have to pay on their income in retirement.

For more information on Australian QROPS, speak to an adviser at Global QROPS Ltd.

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