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UK Pension Expertise

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The transferring of UK pension benefits to Australia is a complex process as each step must comply with both Australian and UK taxation and taxation/super/pension laws. We supply QROPS approved SMSF deeds, specialised minutes and, where we are administering the fund on an ongoing basis, the necessary HMRC (His Majesty’s Revenue and Customs) reporting and ongoing UK compliance. Additionally, SMSF Alliance are registered QROPS Scheme Administrators with HMRC. Scheme Administrator status is only awarded following HMRC’s assessment of character, knowledge, and professionalism. Also, we undergo an ongoing and rigorous document review and consultation process to ensure our documentation and advice is of the highest quality. This is particularly important as UK pension rules change from time to time and are generally retrospective. Australian laws also change so our focus is on ensuring continuous synchronicity. SMSF Alliance, via our Head of Technical, Debbie Thomas LLB, was one of the first Australian Scheme Administrators to be appointed by HMRC and continue to pass ongoing HMRC due diligence checks each year. Debbie can be contacted at customercare@smsfalliance.com.au.

We do not arrange for the physical transfer of funds to Australia however we have alliance partners who do. We will make an introduction for you on request.

As we deal on a business-to-business basis, if you are an individual requiring UK pension services, please refer your financial adviser to us. If you do not have a financial adviser, we would be please to introduce you to one with the necessary UK pension expertise.

The UK regulator

Within the UK, pensions and taxation are administered by HMRC.

Even though a person may no longer be a UK resident for tax purposes, transferring funds to an Australian super fund incurs UK reporting and tax obligations that extend for many years after the funds’ transfer. Ongoing reporting obligations are largely dependent on when the UK pension scheme funds were transferred and the time that has elapsed since the individual was a UK resident for tax purposes.

When money is withdrawn from a UK pension scheme, UK tax may apply. Where an unauthorised payment occurs, such as the transfer to a non-approved fund, tax of up to 55 per cent of the transfer balance may be incurred.

The transfer of benefits from a UK pension scheme to a foreign super fund or pension scheme can be arranged to avoid the payment of UK tax at the time of transfer if it’s done right. When individuals use our documentation and processes, the likelihood of incurring UK tax is quite low – though we cannot guarantee that this would never occur.

The first interaction with HMRC, after the SMSF is established with dual use documentation, is to be registered with HMRC as a Qualifying Recognised Overseas Pension Scheme (QROPS). Without this registration the transfer from the UK Pension scheme cannot be made to the SMSF.

To be included on the QROPS list, one of the requirements is that an Australian super fund must agree to provide ongoing reporting to HMRC, and the fund must restrict the payment of benefits to members aged 55 or older, except in instances of retirement due to ill-health.

Age 55 restriction

As Australian super legislation permits benefits to be released before age 55 in some circumstances (e.g. severe financial hardship, compassionate grounds), Australian funds wanting inclusion on the QROPS list need to limit membership of their fund to people aged 55 or older. This limitation is the major reason why there are almost no APRA funds offering this facility as the market size is insufficient to warrant offering a suitable product. SMSFs find it much easier to impose this condition.

There are currently a couple of hundred Australian super funds included on the QROPS list. Except for one fund, all are self-managed super funds that have specifically restricted membership to people aged 55 or older.

This age restriction will change to 57 in 2028 in line with the UK Government increasing the Normal Minimum Pension Age (NMPA).

What types of pension interests can be transferred?

The three common forms of UK pension arrangements are:

  1. The State Pension
  2. Defined benefit schemes
  3. Defined contribution schemes

Individuals are unable to transfer their State Pension rights or any interest they have in an unfunded defined benefit scheme (e.g. NHS Pension Scheme) to a QROPS.

Defined benefit schemes may be funded or unfunded schemes. Members of funded defined benefit schemes may be able to transfer the cash value of their scheme to a QROPS; however, they must seek UK independent financial advice before the transfer can occur. A UK pension scheme may refuse to allow the transfer of a defined benefit interest to a QROPS.

For practical purposes, the most common transfer requests relate to defined contribution schemes.

UK tax year

The timing applicable to UK pension transfers and ongoing reporting obligations is based on the UK tax year which commences on 6 April each year and ends on 5 April of the following year.

Overseas transfer charge

When a UK pension scheme transfer occurs on or after 9 March 2017, and the individual transferring the funds is not a tax resident of the country where their QROPS is located, an overseas transfer charge applies; for example, an Australian resident requesting their UK pension benefit be transferred to a QROPS located in Malta.
The overseas transfer charge is 25 per cent of the amount transferred.

If a UK pension interest is transferred to a country where the individual is a tax resident, and they cease to be a resident of that country within five full UK tax years of the transfer occurring, the overseas transfer charge will be payable.

Payment of UK tax

A former UK tax resident can generally access their UK benefits on retirement from age 55, or earlier if retirement results from ill-health.

Where benefits are transferred to an Australian QROPS, they will be subject to Australian preservation rules.

For UK tax purposes, benefits must generally be used to purchase a retirement income stream such as a lifetime annuity or a flexi-access drawdown fund (similar to an account-based pension). However, a lump sum of up to 25 per cent can generally be withdrawn free of UK tax as a “pension commencement lump sum”.

When an income stream commences being paid to an Australian tax resident from a QROPS as an account-based pension, the income is subject to Australian tax laws. In Importantly, where an income stream is paid to a person aged 60 or older, it is exempt from Australian tax.

In such circumstances, the double tax agreement between Australia and the UK only taxes the income in the state of residency. Therefore, a former UK resident who is a tax resident of Australia and is aged 60 or over will not have to pay either Australian or UK tax on income they receive from an Australian super fund.

However, where a lump sum is withdrawn from a QROPS, it may be taxable in the UK when it exceeds the 25 per cent limit.

Depending on the nature of the withdrawal, the amount withdrawn may be taxed in the UK at a rate of up to 55 per cent.

Having said that, UK tax is only payable in respect of amounts withdrawn where the withdrawal occurs within specific time frames.

UK transfer occurred before 6 April 2017

Where the UK pension interest was transferred to an Australian QROPS before 6 April 2017, any lump sum withdrawal will be subject to UK tax if the individual is currently or has, during the previous five full UK tax years, been a UK resident for tax purposes.

UK transfer occurred after 5 April 2017

The transfer will continue to be subject to UK tax if:
a. At the time of withdrawal or rollover from the QROPS, the individual is currently, or had been, a UK tax resident in any of the previous 10 UK tax years; or
b. A period of five years has not elapsed since the funds were transferred to the QROPS from the UK pension scheme.

Once the time periods mentioned above have elapsed, benefits may be withdrawn from a QROPS (subject to meeting Australian preservation rules) or they may be rolled over to a non-QROPS. They will not be subject to ongoing UK tax obligations, except for those that relate to investments in taxable property. Naturally, Australian tax will continue to apply, particularly where a member is under the age of 60.

Taxable property

Money transferred from a UK pension scheme must not be invested in “taxable property”. This rule applies no matter how long it’s been since the money was transferred to the QROPS, or the length of time that an individual has been an Australian tax resident.

Taxable property includes investments in residential real estate, holiday homes, timeshare and personal-use assets (such as artwork, antiques, jewellery, cars, boats).

Ongoing reporting HMRC

An Australian super fund that is listed as a QROPS must provide ongoing reporting to HMRC.

Generally, a QROPS and a former QROPS are required to provide ongoing reporting of withdrawals and rollovers, and certain other events, to HMRC during the following periods:

  1. Within 10 years of the funds being transferred to the QROPS from the UK scheme.
  2. At any anytime if the person receiving the benefit is a current UK tax resident.
  3. Where the original QROPS transfer occurred before 6 April 2017 — at any time where a payment is being made to an individual who was a UK tax resident at any time in the previous five full financial years.
  4. Where the transfer occurred after 5 April 2017 — at any time where a payment is being made to an individual who was a UK tax resident at any time in the previous 10 full financial years.

Trustees of a QROPS are also required to report:

Any change of the fund’s or member’s details,

  1. Upon ceasing to be a QROPS,
  2. When the fund invests in taxable property, or
  3. When an individual ceases to be a resident of the same country as their QROPS (for overseas transfer charge purposes) within a prescribed period.

When a QROPS commences paying a pension to a member, only the first payment needs to be reported upon the withdrawal of the first payment.

Mingling UK and Australian super benefits

There may be instances where individuals with UK benefits in a QROPS wish to roll their existing Australian super benefits and/or have future contributions made to their QROPS.

It has been stated that HMRC will treat benefits withdrawn from a QROPS that has both former UK and Australian benefits as first coming from the UK-sourced benefits. This could be problematic if an individual, having met a condition of release, wishes to withdraw all or a part of their Australian-sourced benefit but they are still within their UK reporting period in terms of their UK benefit.

While it can be argued that HMRC does not have jurisdiction over the ordering of super benefit payments withdrawals, it is worth being aware that mingling of Australian and UK super benefits could present unintended consequences.

The problem may also be compounded where an individual has a QROPS that includes benefits transferred both before 6 April 2017 and after 5 April 2017. In such circumstances, consideration should be given to maintaining a separate QROPS for each benefit.

Tax

UK pension funds meet the definition of a foreign super fund. As such, transfers are subject to special Australian tax treatment when transferred to an Australian super fund.

When a benefit is transferred from a UK pension scheme within six months of an individual becoming an Australian tax resident, the transfer is tax-free from an Australian perspective.

If the benefit is transferred to an Australian super fund (i.e. a QROPS), it is counted against the individual’s non-concessional contribution cap.
However, when the transfer occurs after an individual has been an Australian tax resident for more than six months, the growth that has occurred on the UK benefit between the time they became an Australian resident and the time the funds are received by their Australian super fund is taxable. This is referred to as applicable fund earnings.

Applicable fund earnings are included as assessable income of the individual and are taxed at their marginal tax rate.

Alternatively, when an individual’s interest in their UK fund is being transferred, a written election (Australian Taxation Office [ATO] form NAT 11724) may be made to have the applicable fund earnings taxed as income of their Australian super fund. When this occurs, the applicable fund earnings are taxed at a rate of 15 per cent rather than at the individual’s marginal tax rate. When electing to have the applicable fund earnings taxed as income of their super fund, the election form must be given to the Australian super fund no later than when the funds are transferred from the UK fund.

The applicable fund earnings form part of the individual’s taxable component; however, they are exempt from being counted against their concessional contribution cap.

Non-concessional contribution cap

Amounts transferred from a UK pension fund will be counted against the individual’s non-concessional contribution cap, either in part or full. That is, the amount transferred, less the applicable fund earnings where an election is made to have them taxed as income of the QROPS, is assessed against the non-concessional contribution cap.

Therefore, non-concessional contribution implications need to be considered. Before considering the question of non-concessional contribution caps, is the Australian fund able to accept the transfer in the first place? Put simply, if an individual is aged over 75, they will have to firstly meet the work test for the transfer to be accepted by their QROPS.

It is then necessary to consider the non-concessional contribution cap implications.

If aged 75 or older at the start of the financial year in which the transfer is to be received, the amount that can be received will be limited to a maximum of $110,000. That is, the three-year bring forward is not available.

Likewise, if an individual was aged 75 or younger at the start of the financial year, and their total super balance was less $1.68million, the amount they can contribute is 3 times the annual non-concessional contributions cap over 3 years ($330,000).

If a person’s total super balance exceeds $1.9 million, a non-concessional contribution cannot be made; therefore, a transfer from a UK pension scheme will not be possible.

Having an amount transferred from a UK pension scheme that exceeds the non-concessional contribution cap can have unintended UK tax consequences, as any subsequent withdrawal of the excess non-concessional contribution may give rise to an unauthorised (UK) payment that is taxed at 55 per cent of the transfer balance. This problem may be alleviated where an individual has sufficient other Australian super, they could elect to withdraw to cover their excess non-concessional contribution and associated earnings.

Where an individual has a UK pension scheme balance that, if transferred to a QROPS, is likely to exceed their non-concessional cap, splitting the benefit into several separate accounts (possible using a number of Self Invested Personal Pensions) in the UK and then drip-feeding the transfers to a QROPS over time may be a viable option.

Exchange rate

The timing of transactions to take advantage of favourable exchange rates is often an important consideration.

In 2015, the ATO released an Interpretative Decision ID 2015/7 that stated the exchange rate to be used when calculating the applicable fund earnings and the relevant Australian taxation consequences of the transfer with the exchange rate applicable at the time of receipt in Australia of the transferred funds.

Finally

Transferring benefits from a UK pension scheme to Australia can be complicated as it involves the application of laws of both Australia and the United Kingdom.

Not only are transfers restricted to individuals from age 55, but a range of other factors including the application of the non-concessional contribution cap and potential ongoing UK reporting and tax consequences need to be considered.

If you’d like to consider our services further please contact Debbie Thomas at customercare@smsfalliance.com.au.