Guest Blog – UK to Overseas Pension Transfers – Are they still relevant?

15th September 2022

The Author: David Cooper
Financial strategist, investment adviser and Sales Director for United Advisers

In spite of the “traffic light” system continuing to create frustrating delays to pension transfers (as highlighted so excellently by Paul Forman in his article in the August 2022 edition of The Trade Press), there are still solid reasons why an overseas transfer may make sense for those who have left the UK to settle in Europe.

In this article Brendan Harper, Technical Services Manager at Utmost International provides a refresher of those reasons.

  1. No overseas transfer charge

The overseas transfer charge is a tax charge equal to 25% of the transfer value that is levied where a UK pension fund is transferred to an overseas non-occupational scheme where the member is not resident in the same country as the receiving scheme.

The good news is that this charge does not apply as long as the member is resident in the EEA, Gibraltar or the UK, and the receiving scheme is also resident in the EEA, Gibraltar or the UK. So, whereas a resident of, say, Dubai, who transfers a UK pension fund to a Maltese scheme would incur this punitive charge, a resident of, say, France, would not incur the charge, as long as they do not leave the EEA permanently within 5 years of the transfer.

This latter point is important for individuals who may have plans to live outside the EEA in the future, as delaying their transfer may make a transfer in future unviable due to the overseas transfer charge.

  1. Lifetime Allowance Charge

When pension benefits are crystallised, the value of those benefits is tested against the Standard Lifetime Allowance (“SLA”), which is currently £1,073,100. Any excess above the SLA is subject to a one off tax charge of 25% if the funds remain in a drawdown fund in the pension or 55% if they are withdrawn as a lump sum. This charge also applies to non-UK resident members, and there is no relief available under double tax treaties.

The value of the SLA has been slashed from its high of £1.8m in 2011, and increases are pegged to the UK Consumer Prices Index (“CPI”), an inflation measure that is lower than the Retail Prices Index. However, even this inflationary increase to the SLA has been frozen since 2020, and is not due to be reviewed again until at least 2026. With the CPI currently running at 9.5%, this cap increases the risk that more UK pension members’ funds will reach the SLA by the time they retire.

Transferring a UK pension fund to an overseas scheme results in the fund being tested against the SLA at that time, but thereafter there is no further test. So, if the fund is likely to exceed the SLA in future, it may be worth considering a transfer now to avoid a hefty tax charge at retirement.

  1. Currency and Investments

Most UK pension funds are denominated in Sterling only and, in spite of there being no investment restrictions, the reality is that most UK pension investment platforms are concentrated on UK, Sterling denominated, investments, with restricted access to international investments.

This may not be appropriate for a member who has relocated permanently to Europe. Day to day expenses will be in Euros, so retaining a pension fund in Sterling makes the member vulnerable to currency fluctuations. For example, £10,000 is currently worth €11,800, in March this year it would have been worth €12,150, and in August 2019, €10,600. Transferring to a scheme denominated in Euros allows the member to stabilise their retirement income to the currency of their living costs.

  1. The “B” Word

I’m sure we’re all weary of the daily news feed in relation to the myriad of problems emerging from Brexit, and the potential impact on personal investment and pensions is no exception. Remember that the carve-out from the overseas transfer charge for transfers within the EEA was driven by the UK’s obligations as an EU Member State. As this is no longer the case, there is no reason why the UK could not restrict future pension transfers within the EEA also.

Furthermore, EU protection from tax discrimination imposed by individual Member States against foreign pension schemes only really applies to EEA-based arrangements in certain States. Continuing membership of a UK scheme therefore runs the risk that the member could be faced with less favourable tax consequences in their country of residence in future. Transferring to an EEA-based pension significantly reduces this risk.

To find out more about the expatriate solutions available from Utmost Wealth Solutions please talk to your United Adviser’s Wealth Manager or contact us here.

This article is for information purposes only and does not constitute financial advice, which Utmost Wealth is not authorised to provide. We recommend that you seek independent advice in relation to your own particular circumstances.