As Peter does not meet any of the five conditions if he were to transfer his Sipp now an overseas transfer charge of £37,500 (£150,000 x 25 per cent) would be due. This would be deducted from the transfer value.
The second test checks whether the overseas transfer allowance has been exceeded. If the value of the transfer exceeds the member’s available overseas transfer allowance, a charge of 25 per cent on the amount exceeding the allowance applies.
Example
James lives in the UK and is transferring his Sipp to a Qrops in Malta. His Sipp is valued at £1.2mn and he has an overseas transfer allowance of £1,073,100.
As James lives in the UK and the Qrops is established in Malta he passes the first test. However, the transfer value is more than his overseas transfer allowance so a charge will be due on the excess. The charge totalling £31,725 ((£1.2mn - £1,073,100) x 25 per cent) will be deducted from the transfer value.
It is possible for a charge to be due because the transfer fails both tests; it exceeds the available overseas transfer allowance, and none of the five conditions listed above are met.
Where this happens, the 25 per cent overseas transfer charge is applied to the entire transfer value. This ensures that the charge can only apply once.
Unintended consequences
Since its inception the overseas transfer charge has been quite successful as a deterrent for those thinking about moving large amounts of pension wealth out of the UK, with 5,000 less transfers occurring in the 2017-18 tax year – the first year it was in effect for – than in 2016-17.
Yet uncoupling Qrops transfers from the limits on pension lump sums casts doubt on whether the charge will continue to function as intended.
Currently, those with pension rights above £1,073,100 could potentially benefit from transferring the excess overseas. Up to £1,073,100 (or more, if transitional protections are held) could be transferred without incurring an overseas transfer charge. Tax-free cash could then be taken from both the UK fund up to the lump sum allowance, and also from the Qrops.
While the door seems to have been re-opened, even if only for the relatively few with sufficiently large pension savings, this feels too good to be true. It certainly does not seem to be in line with broader government objectives to increase wealth and investment in the UK, so perhaps we will see further changes down the line to tackle this.
Care should also be taken not to lose sight of the bigger picture and simply jump at the potential for more tax-free cash. Pensions are a tax-efficient wrapper and removing extra money from them without a clear plan may lead to an unexpected inheritance tax bill in the future. The decision to transfer to a Qrops should not be taken lightly in any case.
