The Overseas Transfer Charge rules have been changed to remove EEA, UK and Gibraltar exemption, to prevent UK residents from using QROPS to take higher levels of tax-free cash, buried in another UK Budget 2024 pension update.
Isle of Man-based QB Partners managing director David White said Malta and Gibraltar based QROPS have long been used for UK and EEA residents to transfer their UK pensions to in relevant circumstances, for example to protect from double taxation, to provide portability and/or for non-UK retirees to access benefits in their local currencies.
Since the abolition of the Lifetime Allowance in April, they have also provided an opportunity for higher tax-free cash in some circumstances.
White further said: “The removal of the relevant Overseas Transfer Charge exemption, which allows UK or EEA residents to transfer to EEA or Gibraltar based QROPS without a 25% tax charge, will prevent UK residents and non-Malta/Gibraltar residents from transferring to Malta/Gibraltar QROPS in most cases.”
This change has been implemented with immediate effect as from 30 October 2024.
IFGL pensions technical manager Steve Berridge also highlighted this change as a “sting in the budget tail” which exclusively affects the international pension market: “Hidden within the detail of the official HMRC Treasury Budget document is confirmation that the Government is going to remove the exclusion from the Overseas Transfer Charge for transfers to Qualifying Recognised Pension Schemes (QROPS in the European Economic Area (EEA) or Gibraltar from October 2024 “to address the risk of individuals receiving double tax-free allowances”.
“Currently there is an exemption where the individual and QROPS were both resident in a country within the EEA/Gibraltar. This has been removed.
“Further down the document is a note confirming that the government will bring in line the conditions of Overseas Pensions Schemes (OPS) and Recognised Overseas Pension Schemes (ROPS) established in the EEA with OPS and ROPS established in the rest of the world from 6 April 2025. Again, we will await the detail on this in due course.”
Rachel Vahey, head of public policy at AJ Bell, said: “The abolition of the lifetime allowance rules back in April created an interesting situation where pension savers could double dip on their pension allowances by transferring overseas.
“Those with large pension funds could leave £1,073,100 in their UK scheme and transfer any excess to a qualifying overseas pension scheme. They then could take their maximum tax-free lump sum of £268,275 from their UK scheme, as well as any tax-free cash entitlement from their overseas scheme.
“HMRC has now closed this loophole, but in the process may have caused pension currency chaos for overseas retirees.
“It has removed the exclusion that the overseas transfer charge (OTC) will not apply if someone transfers to a QROPS in the EEA or Gibraltar, even though they were not resident in the same country.
“One consequence is those who want to retire overseas, but where there are no QROPS registered in their new country of residence, will be forced to keep their pension scheme in the UK or face a 25% charge on transfer.
“As overseas residents may struggle to hold a UK bank account, and many UK pension schemes won’t pay to non-UK bank accounts, this could leave these overseas retirees in a difficult position. Even where they can hold an account, they still face a harsh choice whether to juggle currency risks when taking pension income or lose 25% of their pension wealth on transfer.”
The overseas transfer charge (OTC) of 25% was introduced in 2017 on transfers from UK registered pensions schemes to qualifying recognised overseas pension scheme (QROPS). However, certain transfers were excluded from the charge.
The changes mean the OTC will now apply to transfers requested from 30 October 2024 to a QROPS established in the EEA and Gibraltar where the member is UK resident or resident in a different country within the EEA.
Transfers to qualifying pension schemes in the same overseas country the member is resident in will continue to be excluded from the charge.
This will lead to practical difficulties to those who want to retire in the EEA but are unable to transfer their pension to the same country
Details of the government statement on this are here.
