What Taxes are Levied on a QROPS Transfer?
QROPS Transfer to Australia and New Zealand were once tax free
There was once a time when transferring a UK pension to an Australian or New Zealand QROPS would not be taxed. However, all that changed when the UK government brought in the OTC, or the Overseas Transfer Charge, which is essentially a tax on QROPS transfers in certain circumstances. If applicable, the OTC is charged at 25% of the transfer value of the funds being transferred into the QROPS. This could apply whether the transfer to a QROPS is from a UK Defined Benefit or Defined Contribution scheme.
Final salary schemes or defined benefit (DB)
Final schemes or defined benefit (DB) schemes as they are also known, are often more generous than other types of private or employer pensions such as defined contribution (DC) schemes. They also offer guarantees and protections that other schemes do not and that can make them very attractive. The disadvantage is that they are often inflexible and scheme members are not allowed to change or increase the amount of income paid out. DB schemes have their own rules with regard to when and how much money can be withdrawn.
When the new pensions freedoms were granted in 2015, people were given much more control over when and how they drew cash or income from their funds. However, these freedoms do not apply to DB schemes. Increasingly, people do not want to choose to purchase an annuity, preferring instead to use income withdrawal to fund their retirement. This trend has led to more people seeking to transfer out of their final salary schemes and QROPS is the attractive option.
Cash Equivalent Transfer Value (CETV)
Members of DB schemes are able to transfer their funds into a QROPS – when they do, they receive a Cash Equivalent Transfer Value or CETV. An actuarial calculation is carried out to establish how much it would cost a person to purchase an annuity on the open market which would provide the same income as that provided by their DB.
When a member decides to transfer their DB pension over to a QROPS, the 25% transfer tax is applied to the CETV of the DB scheme.
Ensure you transfer to a QROPS
Remember that as unattractive as the OTC may be, it could be worse. If a transfer is made to an overseas pensions scheme that is not recognised as a QROPS, it is treated as an unauthorised transfer and charged at 40%. That’s one reason why it is so important to get the right advice from an organisation such as bdhSterling.
When was the Overseas Transfer Tax introduced?
The OTC was drafted in as part of the UK Spring Budget 2017 and came into force on 9 March 2017. Any QROPS transfers that took place before 9 March 2017 were not subject to the new charge. However, from 9 March 2017 onwards transfers to QROPS could be taxed at 25%.
When is a tax not levied?
The Overseas Transfer Charge is not always applicable to QROPS transfers. Any transfer that was specifically requested before 9 March 2017 will not be charged. There are also a few other circumstances where the tax will not be levied.
Are you residing in the same country as the QROPS? If so, you don’t have to pay the overseas transfer charge. Similarly, if you are residing in a European Economic Area (EEA) country and want to transfer your pension to a QROPS in another EEA country, no OTC will be applied to the transfer.
Is the QROPS you are transferring to an occupational pension scheme provided by your employer? If you are transferring to an occupational pension scheme and you are an employee of a sponsoring employer under the scheme, then you don’t have to pay the transfer tax.
What if the QROPS you are transferring to is an overseas public service scheme that your employer participates in? Again, no tax would be applied to your QROPS transfer. The QROPS you are transferring to may be the scheme of an international organisation that you work for. In certain cases, you will not have to pay OTC on the QROPS transfer. If you are working for a multinational employer don’t assume that a transfer into the company QROPS will be exempt. The rule only applies to certain organisations. Your adviser at bdhSterling can guide you further on this.
Might you get your tax back?
Certain changes in circumstance can occur within the five years commencing when the transfer takes place. Sometimes these changes mean that although the OTC has already been applied to the fund transferred to the QROPS the charge can be retrospectively refunded by HMRC. For example, an individual may transfer their UK pension benefits to a New Zealand QROPS before moving to New Zealand. In this case the OTC of 25% of the transferred fund would apply (as the QROPS member was not living in New Zealand at the time of the transfer). However, if the QROPS member moves to New Zealand within 5 years of the original transfer, the OTC deducted can be refunded. This cuts both ways and a QROPS transfer that was not taxed can become taxable within the same time period of five years (if the client moves away from the country that their QROPS funds are held).
The lifetime allowance
There is an upper limit on how much can be drawn from a UK registered pension without incurring an extra tax charge. This is called the lifetime allowance and is currently set at £1 Million for tax year 2017/18. If you transfer more than this into a QROPS, a tax charge of 25% may be applied to the excess amount over and above the lifetime allowance (depending on whether you have applied for any protection on the fund).
Tax on withdrawls
Once the QROPS transfer has taken place that does not necessarily mean the end of all taxable events. Withdrawals could also be taxed as an income and the tax rate will depend on the tax rules where the QROPS is based (and also where the individual is living). Depending on where this is, it could be significantly lower than the UK’s income tax rates. This is just one of many considerations when thinking about transferring to QROPS.
The right advice is essential
If a QROPS transfer is the right move for you, the benefits can be enormous. However, there are many considerations, including whether or not the transfer tax will be levied and how much it will be if it is. We strongly advise you to speak to a consultant at bdhSterling to gain an informed perspective.