9596752 - piggy bank - uk (isolated)Q: Since April 2015, transfers from UK Pension Funds to Australian superannuation funds have become harder to complete due to the reforms in the UK pension law regime. We heard that you need to set up a Self-Managed Superannuation Fund (SMSF) to get around these changes. We have resisted the opportunity to open a SMSF due to the costs and complexity involved. We have not been able to obtain a clear message on whether we should head down this path. Thoughts?

A:  The UK pension law regime was amended from 6 April 2015. This effectively closed transfers from UK pension funds into the Australian Superannuation system, unless the superannuation fund prevents payment of pension before the member reaches age 55 or retirement on ill-health grounds as defined under UK law.

In the vast majority of cases, superannuation funds within Australia allow withdrawals in certain circumstances (such as severe financial hardship, total and permanent disablement and compassionate grounds). This means, all superannuation funds (including SMSF’s) would not comply from 6 April 2016 onwards.

In practical terms, the opportunity to undertake a transfer from a UK pension fund now really only applies to people over 55 who have a SMSF.  The SMSF still needs to be classified as a qualifying recognised overseas pension scheme (QROPS) and be registered on the List of Recognised Overseas Pension Schemes (which is available on the Her Majesty’s Revenue and Customs (HMRC) website – click here).

An integral part to achieve the QROPS status and having your SMSF on the HMRC list is to have the superannuation fund’s trust deed amended to comply with the UK pension law regime. In general terms, the amendment needs to restrict membership to people over 55 and ensuring the precise wording of the UK pension law regime (such as ïll-health grounds”) is included.

Some specific considerations you also need to consider include:

  • The amount of the UK pension transfer will count against your non-concessional cap. Non-concessional contributions are subject to a yearly cap of $180,000 for members 65 or over but under 75. A bring forward rule applies to members under age 65 for the amount of $540,000 over a three-year period. Important: The 2016 Federal Budget[1] included a proposal to replace the Non-Concessional Contribution Cap with a lifetime cap of $500,000.  Contributions received in excess of $500,000 will need to be removed from the fund or be subject to penalty tax. If legislation is passed, the proposed change is effective from Budget night (3 May 2016) and captures all Non-Concessional contributions made into Superannuation since 1 July 2007.  Contributions received from 1 July 2007 and made before 3 May 2016 will not result in an excess to the cap.
  • Prescribed reporting and compliance requirements to the HMRC as part of the QROPS requirements. This obligation continues until 10 years has elapsed from the date of the transfer of UK sourced moneys into the SMSF.

Commencing a SMSF is a big decision in its own right and should be considered as part of your overall goals and objectives.  The amount of funds needed to commence a SMSF has been debated and the relevant regulators have set minimum benchmarks. Clients with $400,000 to $500,000 or more in superannuation can achieve some excellent outcomes by commencing a SMSF to gain control of their retirement savings. In a recent Blog Post, Andrew Heaven outlines the key reasons you should consider before commencing a SMSF – click here.

So what next?

A SMSF can give you great flexibility and control in managing your Superannuation.  Whether a SMSF and transferring your UK Pension Funds into it is the right decision needs to be determined. Specialist advice from an expert is required on the transfer, set up of the fund and ongoing requirements.

[1] 2016-2017 Federal Budget Papers – http://budget.gov.au/2016-17/content/