For people who are living abroad or planning to move overseas to countries like Australia or New Zealand, transferring their pension to a QROPS can be a good idea, particularly if they have a sizeable pension pot. At the same time, they must be mindful of the Lifetime Allowance.
The rise and fall of the Lifetime Allowance
In 2006, a Lifetime Allowance was introduced to limit the amount of benefit that could be drawn from pension funds without incurring a charge. Originally, this threshold was set at £1.5 million. The Lifetime Allowance was increased annually until 2010 when it had reached a level of £1.8 million.
Since 2010, a number of pension reforms have seen the Lifetime Allowance steadily reduced. It has remained at £1 million since 6 April 2016.
And rise…
For first time in seven years, the Lifetime Allowance is set to rise by £30,000, on 6 April 2018. This is due to the government’s intention to index it annually, in line with the Consumer Prices Index (CPI).
What happens when the threshold is reached?
The short answer is that any pension benefit drawn from a pension scheme, over and above the Lifetime Allowance, will be taxed at a minimum of 25% on the excess. The allowance applies to all the pensions you may have – but excludes your State Pension.
Every time money is drawn or transferred overseas, this is classed as a Benefit Crystallisation Event (BCE) and such events are triggers for your total benefit to be measured against your Lifetime Allowance.
If you die before taking any benefits, this is also viewed as a BCE and the value of your benefits would be tested against the Lifetime Allowance. A Lifetime Allowance test is also carried out if you have not taken all of your benefits by the age of 75. This test is applied to your remaining benefits.
What does the UK government say about Lifetime Allowance?
The UK government’s website says, “you usually pay tax if your pension pots are worth more than the lifetime allowance,” so the size of the pot is the defining factor. However, the pot will only be measured and tax will only be payable when a BCE occurs.
Note that “what counts towards your allowance depends on the type of pension pot you get.” The method of establishing the level of benefits that you have could vary depending on whther the member is in a Defined Benefit (DB) or defined Contribution (DC) scheme. In order to ensure you receive the best possible advice on this detailed area, seek advice from the experts at bdhSterling.
How much do I pay?
How much tax you pay depends on how the money is paid to you. If you draw a lump sum you will be taxed at 55% on the excess drawn. If you receive your money in any other way, such as pension payments or a transfer to QROPS, for example, you will be charged at 25%.
Can I protect my pension pot?
In certain circumstances you can protect your pension pot from reductions in the Lifetime Allowance. Individual protection may be applicable if the total value of your pension pot was more than £1 million on 5 April 2016. You can find this information out by using HMRC’s own Lifetime Allowance checker.
With Individual Protection 2016, the value of your pot as it stood on 5 April 2016 can be protected (up to £1.25M), but anything over and above that value is not. Note that there were earlier protections available such as Individual Protection 2014.
Some people will have opted for Fixed Protection 2016, which effectively allowed them to freeze the Lifetime Allowance at £1.25 million, provided they paid no further contributions towards their UK pensions since 6th April 2016.
What about my QROPS?
If you transfer funds from your UK pension to a QROPS, this is also a BCE and you will pay the Lifetime Allowance charge if your pension fund exceeds the Lifetime Allowance at the point of transfer. If you are under 75 years old, anything transferred to a QROPS that is over your unused allowance could be charged at 25%.
Need expert help with your QROPS?
The rules on UK pensions, QROPS and the Lifetime Allowance, are just the tip of the iceberg in what is a very complex area of financial management. If you are considering transferring your UK pension to a QROPS and want to be sure it is the right decision for you, speak to an expert at bdhSterling.
We can guide you on the details of the process and the implications for you and your savings. Contact us today.
