Tread 'very carefully' with overseas transfers amid UK Election limbo

The removal of the UK's lifetime allowance on 6 April 2024 brought in new allowances and introduced a significant amount of complexity for advisers to wrestle with. It seemed to many in industry that some of these changes were a bit “last minute” and indeed HMRC appeared to have tied itself in knots with some sections of the legislation, says Steve Berridge, technical services manager at IFGL Pensions.

One of the areas most affected is that of overseas transfers. This includes transfers both from and to the UK.

For transfers to the UK, members who previously transferred to a QROPS and are now transferring it to a UK pension scheme are in danger of losing out, because the rules now require pension schemes to reduce the new Lump Sum and Death Benefit Allowance and Lump Sum Allowance by 25% of any lifetime allowance usage before 6 April 2024. The old overseas transfer BCE8 test used up lifetime allowance and if members haven’t crystallised benefits in the UK, they will incur a 25% deduction from the new allowances even though they haven’t taken a tax-free cash sum within the UK income tax regime.

The answer for members in this situation is to request one of the new Transitional Tax-Free Allowance Certificates (TTFAC) on transferring back to the UK, which will ensure their allowances are not reduced. They need to have that certificate however before they start taking non-taxable benefits in the UK.

The situation is more serious for individuals who wish to transfer overseas and have already crystallised benefits in the UK. This is because the calculation for the new Overseas Transfer Allowance (OTA) requires pension providers to reduce the OTA by the value of any lifetime allowance usage before 6 April 2024 and to reduce by 100% of the usage, rather than the 25% which applies in most other circumstances.

So, taking the hypothetical case of a bloke called Mike, imagine he had crystallised 75% of his pension fund in 2015, when the lifetime allowance was £1,250,000, designating to drawdown and taking PCLS.  If he now transfers his pension pot to a QROPS, the overseas transfer allowance will be reduced by 75% and the value of his pension measured against that smaller figure, rather than the full £1,073,100 allowance.

He is almost certainly going to exceed the OTA and incur a 25% tax-charge on the excess.

This double counting is a result of some clumsiness in the wording of the new legislation. Clearly what should happen is that the overseas transfer allowance is NOT reduced by previous lifetime allowance usage, or if it is, reduced by only 25% to be consistent with HMRC’s approach on their other new benefit calculations.

HMRC issued a last-minute newsletter on 5 April 2024 advising that members considering a transfer to a QROPS might wish to postpone it until the rules have been corrected. All well and good, but here we are in mid-June now, with no indication when HMRC will carry out the correction, which is really not helpful to ex-pats to want to move their pensions out to a QROPS and in some cases have time sensitive deadlines, due to the way in which benefits can be taxed in their new host country.

The UK election is likely to put the brakes on any legislative amends, so this is one area that advisers need to be on their guard for.  If your client is seeking to transfer overseas and has a large pension fund made up of crystallised benefits, then be very careful. It might be worth postponing the transfer for the time being, but at the very least careful consideration needs to be made of the impact of the charge, against any possible tax implications which may occur in the new scheme, if the transfer does not take place before a particular deadline.