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The low down on UK pension transfers

There have been a number of developments in recent years both in Australia and in the United Kingdom that have reduced the availability and attractiveness of UK pension transfers.

In addition, there was a period in 2015 where it was uncertain whether such transfers would continue to be allowed under UK legislative amendments that came into effect in April that year. As a result, fewer advisers were providing advice in this area, which is a shame as it remains a valid advice strategy and the benefits can be significant for the right client.

The most significant change over the last couple of years was a change in the UK rules, which generally restricted UK pension transfers to those over age 55 at the time of transfer. A further outcome of this change was for an Australian superannuation fund to receive UK pension transfers and be given the Qualifying Recognised Overseas Pension Scheme (QROPS) designation, the fund had to ensure that for the life of the fund only individuals who had reached the age of 55 could become members of the fund.

This affected public offer funds that had held the QROPS designation before the change and many exited the market. SMSFs stepped in to fill the gap and while the list of Australian QROPS funds isn’t exclusively SMSF, they dominate the list with about 350 added in the past 18 months.

April 2017 changes

However, just as the UK pension transfer activity was picking up again, the UK authorities earlier this year introduced further restrictions. When UK pension funds are transferred to Australia, there is a period where they are subject to UK rules -the control period. For transfers made to Australia before 6 April 2017, the control period ceases when the individual has not been a resident of the UK in the current or any of the five previous UK tax years.

For transfers made to Australia on or after 6 April 2017, the control period extends to the 10 previous UK tax years. Where payments are made from a fund during the control period, it may be considered an unauthorised payment and attract UK tax of up to 55 per cent of the amount paid. This includes situations where the member does not receive the funds such as is the case when using a release authority to pay an excess contributions tax or charge.

The second change introduced on that date applies to payments made out of funds transferred to Australia on or after 6 April 2017. Any such payments will be subject to UK tax rules for five years after the date of transfer, regardless of where the individual is a resident.

This is an important difference in how we handle UK funds when they have arrived in Australia. Previously, where a client from the UK had moved to Australia and ceased being a UK resident many years ago, there were minimal restrictions on their UK funds once they arrived in Australia. This was due to them being outside the control period which is based on when they were last a UK resident.

Under the new regime for funds transferred on or after 6 April 2017, clients who have been away from the UK for a long period will still have to be careful around how they transact on those funds for five years from the date of transfer.

Which clients will this affect?

While the restrictions on the strategy have increased, the benefits remain. The biggest is that pension payments paid from an Australian superannuation account/fund to someone over 60 are tax-free. However, UK pension payments to a UK resident are taxed at their marginal tax rates less a deductible amount. There is also far greater flexibility on taking lump sums and on death any remaining superannuation balance is available to be distributed to beneficiaries. Obviously there are potential drawbacks as well, such as losing the security of a defined benefit pension, and these should be weighed up carefully before making any decision on whether to transfer.

When all is taken into account, there is a clearly identifiable client base for this strategy including those who:

· have worked in the UK for a number of years on a good salary,
· have turned or are about to turn 55,
· are under 65, or aged 65 to 74 and satisfy the work test,
· have less than a $1.6 million Australian total superannuation balance, and
· intend to remain in Australia indefinitely.

It should be noted this is a complex area of advice and knowledge of the Australian and UK rules is required. The restrictions are not just on the member but also on the trustee and on what investments the SMSF can make. As such, advisers wishing to provide advice in this area need to ensure they are appropriately skilled and resourced.

Otherwise, they should consider partnering with a specialist UK pension transfer service provider.

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