UK pensions when clients move overseas

Where client’s move overseas, either temporarily or permanently a key concern is what will happen to their UK pension plans. This perennial question appears to have become even more common in recent years, perhaps partly due to automatic enrolment where even those working in the UK for a short period may have been placed into their UK workplace pension scheme, whereas previously this wouldn’t have occurred for those only expecting to be in the UK for the short term.

Where clients leave the UK for a temporary period the initial question is often whether their contributions to their UK scheme can continue. For a non-UK resident, tax relievable personal contributions to an existing UK scheme can be made of up to £3,600 a year for up to five years following the year of departure. Employer contributions are not subject to any specific restrictions but must still meet the usual “wholly and exclusively” rules for the employer to receive corporation tax relief. If the individual’s contract remains with the UK employer then it may be possible to keep the contributions going. However, as well as the UK rules the client would need to confirm the tax position in their country of residence and consider whether contributions to the UK are the best option rather than local alternatives.

Where clients make a permanent move away from the UK the concerns move to whether the funds can remain invested in a UK pension and how they will be able to access them when required. If a client moves overseas there are essentially two options. Firstly, they can leave the funds invested in the UK scheme. From a UK perspective, all the normal rules and tax benefits apply. Once the individual reaches the minimum UK retirement age they can access benefits in the normal way. However, there may be business acceptance implications, if, for example, they need to set up a new contract to take benefits as drawdown. When benefits are taken there will be a benefit crystallisation event and any LTA charges will be deducted if applicable.

The double taxation agreements between the UK and most countries ensure that pension income is only taxed in the country where the client is resident when they receive the benefits. However, this is not always the case and clients would need to check the individual agreement. In addition, a UK pension scheme must pay out benefits under PAYE and so can only pay these out gross if they have been provided with the appropriated tax code to confirm non-UK taxpayers. If not, UK tax will be deducted as normal and the client will have to reclaim this. The benefits will then normally be subject to tax in their country of residence. Although 25% of the funds are usually available free of UK tax this will not always be the case in other countries.

The alternative to leaving the funds in the UK is to transfer the pension overseas. In order to avoid an unauthorised payment charge transfers from a UK pension scheme must be made to a Qualifying Recognised Overseas Pension Scheme (QROPs). The funds will be tested against the lifetime allowance when they leave the country and if the pension doesn’t go to the same jurisdiction as the individual then it may incur a flat rate 25% overseas transfer charge. HMRC regularly updates its Recognised Overseas Pension Scheme list and for a significant number of country’s there are none listed meaning a transfer without significant tax charges will not be an option leaving the only viable choice being to leave the funds in the UK. 

Pension planning can be complex at the best of times. Where clients are internationally mobile it is important they consider and understand both the UK tax implications and the taxation in their country of residence.