The Budget 2017 by Philip Hammond, the UK Chancellor, delivered a significant shock to the pension transfer market by announcing the introduction of a 25% tax charge on certain pension transfers to Qualifying Recognised Overseas Pension Schemes (QROPS).
QROPS have been popular for British expatriates living and/or retiring abroad as a QROPS can enable a person to move their UK pension to the country where they live (providing a QROPS exists in that country). The announcement in the Spring Budget aims to deter people from moving their UK pension to a QROPS simply for tax advantages. For example, if a British expatriate moved their UK pension to a QROPS in Malta and the expatriate did not live in the European Economic Area (EEA).
The 25% tax charge will apply to any request to undertake a QROPS transfer after 9 March 2017, unless the transfer meets one of the following conditions:
- The pension member is resident in the same country in which the QROPS receiving the transfer is established
- The pension member is resident within a country within the EEA and the QRPOS is established in a country within the EEA
- The QROPS is set up by an international organisation for the purposes of providing benefits for or in respect of past service as an employee of the organisation and the member is an employee of that international organisation
- The QROPS is an overseas public service pension scheme and the member is an employee of the employer that participates in the scheme
- The QROPS is an occupational pension scheme and the member is an employee of a sponsoring employee under the scheme
When a QROPS transfer meets one of the above conditions, and is not subject to the tax charge at the time of transfer, it may still become chargeable later if the conditions which were met to make the transfer tax-free cease to be met within the five full tax years following the date of transfer.
The 25% tax charge will be deducted before the transfer to the QROPS takes place by the pension administrator of the pension scheme making the transfer.
The Treasury said only a “minority” of the estimated 10,000 – 20,000 transfers to QROPS each year would be affected by the new charge. However, where it does affect expatriates, it could well result in the effective closure of the market in certain jurisdictions.
For British expatriates living in the United States who are currently considering a QROPS, this new tax is likely to be a significant deterrent. For US residents/taxpayers, there are already potentially significant US tax implications associated with undertaking a transfer from a UK pension to a non-UK based pension. This new UK tax will only add to the complexity of QROP transfers. However, other options like UK personal pensions can still offer great benefits for a British expatriate without attracting this new UK government tax.