In August, HMRC released their pension schemes newsletter 161, which shared some eye-catching statistics about transfers from UK pension schemes to qualifying recognised overseas pension schemes (Qrops).
HMRC’s data showed that in 2023-24 the number of transfers to Qrops more than doubled on the previous tax year, rising from 3,300 transfers in 2022-23 to 7,100. The increase in the value transferred was significant as well, climbing from £680mn to £1.14bn.
There is an obvious explanation for this: the abolition of the lifetime allowance.
Prior to April 6 2023, the value of any pension rights transferred to a Qrops that exceeded a member’s LTA would be subject to a 25 per cent LTA charge. From April 6 2023 to April 5 2024 the LTA still existed but the charge for exceeding the allowance was removed, leaving the allowance intentionally toothless until it could be abolished entirely.
This resulted in a one-year window where unlimited amounts could be transferred from UK pension schemes to Qrops without this penalty.
It is no surprise many members took advantage of the window. There have been jumps in the number of Qrops transfers in each tax year that immediately preceded a significant change to the LTA as members reviewed the impact such a change would have on their retirement plans.
Now the LTA is gone, and the rush is over. Still, some demand for Qrops transfers will continue and there are now new technical aspects to consider, with a few pitfalls to navigate and some perhaps unintended consequences to be aware of which have resulted from the switch to a new UK pensions regime.
Understanding what has changed, and what has not, will help your clients achieve their dreams of retirement on a sunny beach somewhere outside the UK, without any nasty surprises along the way.
Overseas transfer allowance
From April 6 2024 the LTA has been replaced by three new limits on pension benefits: the lump sum allowance, the lump sum and death benefits allowance (LSDBA), and the overseas transfer allowance. It is the latter that is most important for Qrops transfers.
Transfers to Qrops are only tested against the overseas transfer allowance. They do not use up any of the member’s lump sum allowance or LSDBA, so they do not reduce the amount of tax-free cash that could be taken from any remaining UK pension rights.
The overseas transfer allowance limits how much can be transferred to a Qrops before a tax charge applies, mimicking the treatment under the old LTA regime. Pensions legislation sets the overseas transfer allowance as an amount equal to the member’s LSDBA.
For most people, this means it starts at £1,073,100, but it will benefit from any transitional protection the member holds. For example, someone with fixed protection 2014 would have a LSDBA of £1.5mn and their overseas transfer allowance would be the same amount.
