Within the UK, pensions and taxation are administered by Her Majesty’s Revenue and Customs (HMRC).

Even though a person may no longer be a UK resident for tax purposes, transferring funds to an Australian superannuation 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When money is withdrawn from a UK pension scheme, UK tax may apply.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 may apply.

However, in some circumstances, the transfer of benefits from a UK pension scheme to a foreign superannuation fund or pension scheme can be arranged to avoid the payment of UK tax at the time of transfer.

For this to occur, the fund to which the UK benefit will be transferred to must be registered with HMRC as a Qualifying Recognised Overseas Pension Scheme (QROPS).

To be included on the QROPS list, an Australian superannuation 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 superannuation 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.

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

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

Defined benefit schemes may be funded or unfunded 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.

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. A UK tax year commences on 6 April each year and ends on 5 April of the following year.

Overseas transfer charge

When a UK pension scheme transfer occurred 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 where 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 (say) as an account-based pension, the income is subject to Australian tax laws. In particular, 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 superannuation 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.

1. 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.

2. 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 superannuation 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:

1. Any change of the fund’s details,
2. Upon ceasing to be a QROPS,
3. When the fund invests in taxable property, or
4. 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.

Mingling UK and Australian superannuation benefits

There may be instances where individuals with UK benefits in a QROPS wish to roll their existing Australian superannuation 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 superannuation benefit payments withdrawals, it is worth being aware that mingling of Australian and UK superannuation 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.

Peter Kelly, retirement strategies and solutions, Centrepoint Alliance