Recent changes to pension rules by the UK Government came into effect from 6 April 2011 and impact former UK residents who have transferred or are considering transferring their UK Pensions to Australian QROPS.
What are QROPS?
Qualified Recognised Overseas Pension Scheme (QROPS) are superannuation or pension funds recognized under UK law as being eligible to receive transfers from UK Pension Schemes.
Tax on growth in the value of your UK Pension
Where a transfer to an Australian QROPS occurs after six months of the UK resident becoming an Australian tax resident to the date the lump sum is received in Australia, the Australian Tax Office (ATO) may levy tax on the growth of those funds from the date of departure from the UK. Tax is levied through the Superannuation account at the tax rate of 15%. If the UK Pension fund is transferred within 6 months of taking residency, the funds are exempt from this tax.
Anti Avoidance Provisions
Former UK residents who have transferred their UK Pensions to a QROPS fund need to be careful of Anti Avoidance Legislation that came into effect on 6 April 2011. If a former UK resident becomes a UK resident again within 5 years of transferring their UK Pension, their foreign income (including income payments from QROPS funds) may be taxed at 90%. The anti avoidance provision also means that there is no offset in the tax due to reflect tax paid on any of the income even where a double taxation agreement is in place.
Lifetime Allowance reduced
The Lifetime Allowance for pension savings will reduce from ₤1.8 million to ₤1.5 million on 6 April 2012. The Lifetime Allowance is the maximum level of pension benefits a UK resident can draw from all pension schemes in their lifetime without triggering additional UK tax of 50%. Those considering whether to move funds now or later need to be very mindful of this key change.
Funds will be assessed at the time of transfer to a QROPS fund but once funds have been transferred to a QROPS fund, ongoing assessment will not be required.
Benefits of the Australian pension and superannuation system
Despite the complexity and recent (and future) changes, there are good reasons to transfer UK Pension Funds into Australian QROPS, particularly if UK residents are looking to retire in Australia or take up permanent residency.
In Australia, superannuation fund earnings are taxed at 15% within the funds. Superannuation funds when transferred to allocated pensions attract further tax benefits. Allocated pension incomes are concessionally taxed from age 55–60 and tax free after age 60. Earnings on allocated pension assets are tax free within the fund.
On death Australian superannuation and pension benefits are tax free to eligible beneficiaries. If pension funds remain held in the UK, tax of up to 55% may be payable.
There is a huge amount of complexity around UK Pensions and QROPS transfers. The above serves to highlight traps that many considering transferring UK Pension have not been aware of.
When considering whether to transfer a UK Pension to an Australian QROPS, you need to be aware of your individual circumstances and the consequences as they apply to you. For further information or assistance, please contact the WealthPartners office.