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).