An update on QROPS

In April 2015, the UK introduced new rules that impact on the transfer of UK pensions to Australia and other jurisdictions.  Before we discuss the changes, we will investigate the reasons why individuals are keen to transfer their pension funds to Australia.

Why transfer the funds to Australia?

If an individual is planning to retire permanently to Australia and have become a tax resident with a tax file number, there are advantages in transferring the funds to Australia, namely:

  • Pensions and lump sum paid from superannuation from age 60 are tax free. In the UK there is income tax of up to 45% on pension payments.
  • The possible inheritance tax in the UK of 40% if the estate is distributed to beneficiaries other than a spouse while in Australia the tax is limited to non dependants and strategies can be put in place to reduce the tax impost.
  • If the pension fund is maintained in the UK and pension payment transferred to Australia, Australian income tax may be payable on these payments.

As discussed above it can be beneficial to transfer the pension funds to Australia, however the following must be considered:

  • When has the individual moved to Australia – for the transfer to be predominantly tax free it is important that the transfer is done within 6 months of arrival in Australia
  • Whether the individual’s intention is to retire in Australia
  • The domicile of potential beneficiaries of the individual’s estate
  • The funds transferred is subject to 15% tax on earnings in Australia, while if the funds are maintained in the UK, there is no tax in accumulation or pension phase at fund level subject to certain levels.
  • The contribution caps applicable in Australia
  • The currency risk attached to the transfer
  • Staying within the lifetime allowance limit of GBP 1m for 16/17 when funds are drawn from the UK pension fund

Under the QROPS rules, superannuation funds in Australia and other jurisdications are authorized to accept UK pension funds under the UK Finance Act.

However in April 2015, Recognised Overseas Pension Schemes are only superannuation fund/pension schemes which limit all access to superannuation fund monies for individuals under age 55 unless they meet a definition of serious ill health.  In Australia, release of superannuation monies are also allowed under hardship or compassionate grounds and therefore most Australian funds are disqualified to receive UK pension transfers.

At this point in time the Self Managed Superannuation Funds have been able to change their trust deeds to make them QROPS compliant.

It is interesting how the proposed budget proposals will impact on the UK transfers:

  • The lifetime limit of $500,000 will mean that UK transfers will be capped to this amount. As some UK pension funds do not allow for partial withdrawal, this may restrict transfers.
  • The removal of the work test for those aged between 65 to 75 may justify transfers when the individual has firmed up their retirement plans and remove the possibility of retiring in the UK.

To sum up, it is important that caution is exercised when dealing with the clients with UK pension funds. There is also a requirement for the individual to obtain advice in the UK prior to the transfer.