Techzone

It’s not so unusual these days for advisers to have some UK resident clients with overseas pensions - typically in qualifying overseas pension schemes (QROPS) - as well as their UK pension.

Some of those clients may have accrued the funds while living overseas before moving to the UK, while others may have transferred a UK pension to a QROPS to take advantage of the differences between UK schemes and non-UK schemes, or the rules at a particular time.

But with the LTA gone, tax-free cash loopholes closed, and QROPS also included in the estate for IHT from April 2027, is now the time for UK residents to bring their overseas pensions back to the UK?

Closed loopholes

QROPS were introduced in 2006 to allow those retiring overseas to take their pension with them. However, over the years, successive governments have had to tinker with the rules due to concerns that loopholes had emerged, leading to QROPS often not being used for the purpose intended.

Income flexibility

Before 2015, some UK residents transferred their pension funds to QROPS to avoid having to buy an annuity or being restricted by the capped drawdown limits.

Of course, pension freedoms have since removed those restrictions. Members of schemes offering drawdown can draw as much or as little as they want from their pension, whenever needed.

Escaping the LTA tax charge

Before the removal of the lifetime allowance (LTA), some UK residents with pension funds which exceeded - or were likely to exceed - the LTA, transferred some or all of them to a QROPS to avoid, or minimise, an LTA tax charge. Although the transferred pension funds were tested against the LTA at the time of transfer, any growth on those funds would not result in further LTA tax charges.

With the LTA now abolished, LTA tax charges are no longer relevant. Overseas pensions transferred to a UK registered scheme will be tested against the lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA) in the usual way when relevant lump sums are paid. It's worth remembering that tax-free cash taken from an overseas scheme prior to the transfer will not count towards the LSA and LSDBA.

Any potential issue with exceeding the LSDBA on death before age 75 can be avoided by using beneficiary’s drawdown, as this is not tested against the LSDBA.

Extra tax-free cash

Previously, some individuals were able to get extra tax-free cash (potentially double) by transferring out to a QROPS while remaining in the UK.

Following the removal of the LTA, pension funds transferred to QROPS were tested against the new overseas transfer allowance (£1.073M for those without transitional protections) - but, crucially, not the LSA or LSDBA.

Normally, if a transfer is being made to a QROPS but the member is not resident in that country, there would be a 25% overseas transfer charge (OTC) levied on the transfer value. However, there was an exemption if the transfer was being made to QROPS in the EEA or Gibraltar and the member was resident in the UK or the EEA. This exemption opened up the opportunity for additional tax-free cash by transferring to a QROPS in one of these territories, with both Malta and Gibraltar providing an active market for this type of transfer.

This exemption from the OTC was withdrawn from 30 October 2024, closing the loophole.

Some clients may have transferred to a QROPS to increase the overall of tax-free cash available. If they’ve already taken the tax-free cash from their QROPS, they can transfer the crystallised funds back to the UK without it affecting the tax-free cash entitlement on their UK pensions. That’s because tax-free cash taken from the QROPS doesn’t reduce the client’s LSA or LSDBA.

Benefits of bringing QROPS back to the UK

There are some obvious benefits of UK residents transferring their overseas pensions to the UK:

• Simplifying pensions – it’s easier for clients and advisers to deal with providers in the same country and monitor their performance
• No issues with currency conversion for any ongoing withdrawals. Of course, there will be a conversion at the time of transfer.
• No need to worry about claiming double taxation relief, if indeed any exists.
• Often lower fees and more transparent charging structures compared to QROPS.

Other considerations

Establishing if the client is likely to remain in the UK is an obvious starting point. If the client intends to move abroad to retire – particularly if this is soon – then there’s probably little sense in transferring their overseas scheme(s) to the UK.

Before confirming a transfer, it’s always worth checking with the provider of the transferring scheme if there will be any tax implications of transferring the benefits to a UK registered pension scheme, or if there are any valuable guarantees that could be lost.

As touched upon earlier, if a client’s overall tax-free cash entitlement could be restricted by the LSA, taking tax-free cash from an overseas pension can help. Any tax-free cash taken from the overseas scheme doesn’t reduce their LSA or LSDBA. They are then free to transfer the crystallised funds back to the UK without affecting the tax-free cash that can be taken from their UK pensions.

Pensions and IHT from 2027

With pensions coming within the IHT net from April 2027, some may have concerns over transferring overseas pensions to the UK. However, QROPS will face the same IHT treatment as UK schemes for long term UK resident clients. The draft legislation confirms that QROPS, which fall within the wider definition of qualifying non-UK pension schemes (QNUPS), are included within the estate for IHT purposes. Transfers to a UK scheme should not materially change the IHT liability for any clients who intend to remain UK resident.

Clients retiring abroad will remain subject to UK IHT on their worldwide assets for a period after leaving the UK if they have previously been UK resident for 10 out of the last 20 tax years. For someone who has always been UK resident, it will take up to 10 years from becoming non-UK resident for a QROPS scheme to be outside their estate for IHT once the new rules come into play.

The executors of UK resident clients who continue to hold a QROPS scheme at their death will have to deal with the overseas scheme, along with any UK pensions, when determining any IHT payable.

Additionally, the option for any IHT due on unused pension funds to be paid directly to HMRC will only apply to UK registered pension schemes. This means any IHT payable in respect of the QROPS must be paid either by the beneficiary who receives the death benefit, or from the free estate with the executors potentially having to reclaim this from the beneficiary.

Summary

Clients may have overseas pensions for many different reasons. For UK residents, QROPS no longer enjoy any increased tax benefits or additional flexibility than a UK SIPP. The new IHT rules also mean potential delays to the administration of the estate and add further complexity on settling the IHT bill on the QROPS death benefit. All of this could be avoided by transferring to a UK SIPP and bringing all their retirement savings back under advice.