60 MINS CPD COURSE UK PENSIONS & INTERNATIONALLY MOBILE MEMBERS

Transcription

1 60 MINS CPD COURSE UK PENSIONS & INTERNATIONALLY MOBILE MEMBERS

2 INTRODUCTION THIS COURSE FOCUSSES ON THE KEY POINTS OF UK PENSIONS LEGISLATION APPLYING TO INTERNATIONALLY MOBILE MEMBERS. To understand: LEARNING OBJECTIVES Factors determining who can join a UK pension scheme. Pension contributions after a member becomes non-uk resident for tax purposes. Transferring UK pensions overseas including an outline of the QROPS rules. Considerations when transferring overseas pensions to the UK. 1

3 1. ELIGIBILITY TO JOIN A UK PENSION SCHEME PAGE 3 LEGISLATION FINANCIAL SERVICES REGULATIONS BUSINESS ACCEPTANCE CRITERIA 2. CONTRIBUTIONS AFTER LEAVING THE UK PAGE 5 MEMBER CONTRIBUTIONS PAGE 6 EMPLOYER CONTRIBUTIONS PAGE 7 ANNUAL ALLOWANCE AND CARRY FORWARD LTA ENHANCEMENT NON-RESIDENCE FACTOR 3. TRANSFERRING OVERSEAS & QROPS PAGE 10 SAFEGUARDED BENEFITS QROPS RULES PAGE 11 BCE 8 LTA CHARGE PAGE 12 OVERSEAS TRANSFER CHARGE 4. TRANSFERRING OVERSEAS PENSIONS TO THE UK PAGE 15 BASIC REQUIREMENTS LTA ENHANCEMENT RECOGNISED OVERSEAS SCHEME TRANSFER FACTOR PAGE 17 TRANSFERS BACK INTO UK PENSIONS FROM QROPS AND EX-QROPS IORP ANSWERS TO SECTION QUESTIONS PAGE 19 2

4 1. ELIGIBILITY TO JOIN A UK PENSION SCHEME ELIGIBILITY TO JOIN A UK PENSION DEPENDS ON A COMBINATION OF LEGISLATION, FINANCIAL SERVICES REGULATIONS AND EACH PROVIDER OR SCHEME S OWN BUSINESS ACCEPTANCE CRITERIA. LEGISLATION There aren t any HMRC or UK pension legislation restrictions on who can be a member of a UK pension scheme. However, other countries have their own pension and tax legislation. Before making or benefitting from contributions to a UK pension, non-uk residents and dual residents for tax purposes should seek advice on the tax consequences in the other country. This also applies to UK residents who join a UK pension and become non-uk resident or dual resident for tax purposes later on. FINANCIAL SERVICES REGULATIONS Contract based pension providers must be authorised to do business in the country where a prospective member is habitually resident. This is linked to where they actually live, rather than their residence for tax purposes. Individual and group personal pensions are examples of contract based pensions the member enters into a contract with the provider when they set up their pension. Occupational pension schemes are trust based. The scheme rules set out who s eligible for membership. BUSINESS ACCEPTANCE CRITERIA In practice, each scheme or pension provider has its own business acceptance criteria, taking account of the regulatory environment and its own attitude to risk. This means it s important to check whether any particular UK based scheme or provider is willing to accept overseas resident members including those living in the Isle of Man or the Channel Islands. Check whether scheme or provider is willing to accept overseas resident members 3

5 Section 1 Test your knowledge a) What factors will determine whether a French national living in France but working in the UK can join a UK pension scheme? 4

6 2. CONTRIBUTIONS AFTER LEAVING THE UK WITH AN INTERNATIONALLY MOBILE WORKFORCE, IT S RELATIVELY COMMON FOR MEMBERS TO WANT TO CONTINUE CONTRIBUTING TO UK PENSIONS AFTER MOVING ABROAD. MEMBER CONTRIBUTIONS While there are no legislative restrictions on who can become a member of a UK pension scheme, there are restrictions on who can get tax relief on member contributions. Note: This sub-section also applies to third party pension contributions, because it s the member who benefits from any tax relief. The member needs to be a relevant UK individual for a tax year in order to make tax relievable member contributions in that tax year. Someone is a relevant UK individual for a tax year if any one of the following applies: they have relevant UK earnings chargeable to UK income tax for that tax year they re UK resident for tax purposes for at least part of the tax year they were UK tax resident at some time during the five previous tax years and when they became a member of the pension scheme they or their spouse/civil partner has general earnings from overseas Crown employment subject to UK tax for the tax year. Most UK resident members rely on one or both of the first two bullet points to benefit from tax relief on their contributions. Those who move overseas generally rely on the third bullet point. Most people who leave the UK to work full-time overseas for at least a full tax year (6th April to 5th April) will become non-uk resident for tax purposes under the statutory residence test. If they move abroad in other circumstances, they re possibly more likely to remain treated as UK tax resident. The country they move to will have its own rules determining when they become tax resident there. It s also possible to become dual resident for tax purposes in which case, the individual may need to take account of both countries tax rules, and any double taxation treaties. For this reason, individuals moving overseas may need specialist tax advice relating to pension and other matters. 3,600 You can make tax relievable pension contributions for five years after ceasing to be a UK resident The statutory residence test includes split year provisions. This means some people leaving the UK will cease to be treated as UK tax resident part way through a tax year. Even if this applies, they remain a relevant UK individual for pension purposes for the whole of that tax year. So they can make tax relievable member pension contributions of up to 100% of their relevant UK earnings for that tax year or 3,600 if this is higher. If someone is a member of a UK pension operating relief at source before becoming non-uk resident, they can continue making tax relievable contributions of up to 3,600 gross for a further five tax years after ceasing to be UK resident. Contract based pensions, including individual and group personal pensions, normally operate on the relief at source basis. This is where the member pays their contributions net of basic rate income tax with the provider immediately topping them up to the gross amount. However, the member can t benefit from tax relief on member contributions made after ceasing to be UK tax resident if their existing scheme operates tax relief using the net pay method. This applies to most occupational pension schemes. It s legislatively possible to make non-tax relievable member contributions, but schemes operating relief at source are usually unable to accept them. 5

7 Example Ash is already a member of his UK employer s group personal pension when he s seconded to a Dubai subsidiary, initially for three years. He leaves the UK in September He contributes 10,000 gross to his existing pension in 2017/18, when he has relevant UK earnings of 60,000. He pays 8,000 net, gets 2,000 tax relief at source and claims a further 20% tax relief via self-assessment. He also benefits from a 10,000 employer contribution. Ash is then non-uk resident for the whole of 2018/19. In fact, after his secondment is extended, he doesn t become UK resident again until 2025/26. He pays 2,880 net member contributions 3,600 after his provider adds tax relief to his existing pension for the five year period 2018/19 to 2022/23. He makes no member contributions for 2023/24 and 2024/25, as his pension provider is unable to accept non-tax relieved contributions. 20,000 PAID INTO PENSION 3,600 PAID INTO PENSION (Example assumes current tax rules continue.) EMPLOYER CONTRIBUTIONS A UK employer can continue making employer contributions while an employee is working overseas, with no time limit. The employer should benefit from tax relief in the normal way that is, providing its contributions are made wholly and exclusively for the purposes of its trade. Example Continuing the above example, Ash s employer agrees to continue 10,000 a year employer contributions while he s working overseas. His whole secondment to Dubai involves him performing duties on behalf of his UK employer. His employer can show that these contributions are wholly and exclusively a business expense. As a result, it gets corporation tax relief in the usual way. 10,000 PAID INTO PENSION However, it is possible for an employer not to qualify for tax relief on pension contributions it makes on behalf of an employee who s been seconded overseas. Example Let s alter Ash s circumstances. His employer still agrees to continue 10,000 a year contributions while he s working overseas. But his whole secondment involves him performing duties on behalf of the Dubai subsidiary, which pays his salary for its duration. The Dubai subsidiary reimburses his UK employer for the cost of the pension contributions. Therefore, his UK employer isn t actually incurring any business expenses in relation to the contributions and can t claim corporation tax relief. 10,000 PAID INTO PENSION 6

8 ANNUAL ALLOWANCE AND CARRY FORWARD The standard annual allowance, tapered annual allowance and money purchase annual allowance rules apply to members of registered UK pension schemes, including those who are resident overseas. The only exception is for individuals who ve never been UK resident and have never benefitted from UK tax reliefs on contributions. If relevant, the annual allowance charge is payable even if the member is non-uk resident and it isn t covered by any double taxation agreements. The annual allowance rules also apply to members of overseas pension schemes where the member or their employer benefits from UK tax relief. This could apply under a double taxation agreement, section 307 Income Tax (Earnings and Pensions) Act 2003, migrant member relief or transitional corresponding relief. For more information on this point, see HMRC s Pension Tax Manual section PTM hmrc-internal-manuals/pensions-tax-manual/ ptm051100#idac2omb In addition, all the normal carry forward of unused annual allowance rules apply. The individual needs to have been a member of a registered UK pension scheme for the tax year they wish to carry forward unused annual allowance from. But it doesn t matter if they weren t UK tax resident in that tax year. This can be useful for those who want to catch up on pension contributions after returning to the UK. LTA ENHANCEMENT NON-RESIDENCE FACTOR It may be possible for a member to claim a lifetime allowance (LTA) enhancement via the non-residence factor in respect of contributions to a UK pension scheme if they become a relevant overseas individual. However, it s unlikely to be worth doing so unless there are significant non-tax relieved member contributions and/or overseas employer contributions to the UK pension scheme. An individual is a relevant overseas individual for a tax year if one of the following applies: they are not a relevant UK individual (see above) or they are a relevant UK individual only because they have been UK tax resident at some time during the previous five tax years and when they became a member of the pension scheme and they are not employed by a UK tax resident employer. To be eligible to claim an LTA enhancement, the individual needs to be a relevant overseas individual during part of an active membership period from 6th April 2006 onwards. The non-residence factor is calculated by dividing the amount of contributions to, or accrual under, the individual s pension arrangement during that part-period by the standard LTA for the tax year in which that part-period ends. 7

9 Example Beryl begins to accrue benefits in her money purchase pension Beryl is seconded to work overseas Beryl becomes a relevant overseas individual 6th January th November 2010 (in 2010/11) 6th April 2011 (in 2011/12) Beryl returns to work in the UK on 6th May 2014 and ceases to be a relevant overseas individual on 5th April 2014 (in 2013/14) before a benefit crystallisation event (BCE) and before she stops building up benefits in her pension. 150,000 member plus employer contributions are made to Beryl s pension between 6th April 2011 and 5th April 2014 i.e. during the 2011/12 to 2013/14 period in which she s a relevant overseas individual. Her non-residence factor is 0.1 calculated by dividing 150,000 by 1.5 million, the standard LTA for 2013/14. If she has a first BCE in 2018/19, this would be tested against an enhanced LTA of million, calculated as the standard 1.03 million LTA x 1.1. If someone wants to take advantage of the non-residence factor, they have to notify HMRC no later than five years after the 31st January following the end of the tax year in which the accrual period ends. That happens on the earliest of the following: immediately before a BCE the individual ceases to be a relevant overseas individual the individual s benefits under the arrangement cease to accrue. For more information on the non-residence factor including full details of the rules, see HMRC s Pension Tax Manual starting from PTM

10 Section 2 Test your knowledge a) If a group personal pension member leaves the UK and ceases being UK resident for tax purposes, what pension contributions can they normally make or benefit from? b) If an occupational pension scheme member leaves the UK and ceases being UK resident for tax purposes, what pension contributions can they normally make or benefit from? c) When can a member who s been non-uk resident benefit from a LTA enhancement via the non-residence factor? 9

11 3. TRANSFERRING OVERSEAS & QROPS PEOPLE CONSIDER TRANSFERRING THEIR REGISTERED UK PENSIONS OVERSEAS FOR A VARIETY OF REASONS, INCLUDING MOVING PERMANENTLY ABROAD TO WORK OR RETIRE. HOWEVER, A HISTORY OF USING OVERSEAS TRANSFERS TO GET AROUND UK PENSIONS LEGISLATION LED TO THE RESTRICTIVE QUALIFYING OVERSEAS RECOGNISED PENSION SCHEME (QROPS) RULES. SAFEGUARDED BENEFITS Safeguarded benefits include defined benefits, guaranteed minimum pensions and guaranteed annuity rates. If a member has safeguarded benefits worth more than 30,000, they must receive regulated advice from a UK financial adviser before transferring those funds. This requirement includes overseas transfers, where the member is also likely to need advice from an overseas based adviser in respect of the other country s pension and tax regime. QROPS RULES An overseas transfer is only an authorised payment if the receiving overseas scheme is a QROPS as at the date of the transfer. The status of the transfer doesn t change if the receiving scheme ceases to be a QROPS at a later date. However, a transfer to an overseas pension which clearly is, or later turns out to be, a non-qrops as at the date of the transfer is an unauthorised payment, subject to a 40% unauthorised payments charge and possibly also a 15% unauthorised payments surcharge and a scheme sanction charge. Two tax charges can apply to transfers to QROPS an LTA charge under BCE 8 and an overseas transfer charge. If an overseas transfer charge applies, the LTA check is carried out first, and any LTA charge applied before calculating the overseas transfer charge. DOUBLE CHARGING IS POSSIBLE In order to be a QROPS, an overseas pension scheme must first be a recognised overseas pension scheme (ROPS). To become a QROPS, all the following must also apply: 1. the scheme must self-certify to HMRC that it s a ROPS 2. it must undertake to report information on UK tax relieved pension savings, pay tax when due and inform HMRC if it ceases to be a QROPS 3. HMRC must not have excluded it from being a QROPS. HMRC publishes a regularly updated ROPS list, which warns the member and their UK pension provider or adviser that they re responsible for the due diligence to establish whether a particular overseas pension scheme actually is a QROPS before transferring. guidance/check-the-recognised-overseaspension-schemes-notification-list Following a transfer, a range of restrictions apply to QROPS investments and benefits. UK tax charges can still apply for a period after transferring. Unauthorised member payment tax charges can apply if the QROPS restrictions are breached. Where relevant, the overseas transfer charge applies to both QROPS and former QROPS. This matters, because even once the funds are in an overseas scheme, a transfer from a QROPS to another QROPS or from a former QROPS to a replacement QROPS can trigger an overseas transfer charge, as explained later. For more information on the QROPS rules, see HMRC s Pension Tax Manual starting at PTM pensions-tax-manual/ptm

12 25% LTA CHARGE (if applicable) BCE 8 LTA CHARGE If the member is under age 75 when they transfer from a UK pension to a QROPS, a LTA test under BCE 8 applies to both crystallised and uncrystallised funds. Although there s no BCE 8 test in respect of funds crystallised into drawdown before 6th April If an LTA charge applies, it s at 25% and deducted by the UK provider before transferring the funds overseas. Example MAY 2015 Forrest crystallises 1.2 million when the LTA is 1.25 million. Examples Cliff transfers 800,000 to a QROPS in June 2018 at age 50, triggering BCE 8. He has no previous BCEs and uses up 77.67% of the standard 1.03 million LTA for 2018/19. No LTA charge applies. Daisy transfers 2.35 million to a QROPS in June 2018 at age 68, triggering BCE 8. She isn t caught by the overseas transfer charge. She has fixed protection of 1.8 million and no previous BCEs, giving her a 550,000 LTA excess. After deducting the 25% LTA charge of 137,500, her provider transfers 2,212,500 to her chosen QROPS provider. There s no double charge under BCE 8 for crystallised funds. The amount originally designated for drawdown under BCE 1, or for a scheme pension under BCE 2, is deducted from any crystallised funds when carrying out the BCE 8 test. 25% taken as tax-free cash (BCE 6) 1.25 million fixed protection 2016 protects his LTA 900,000 designated for drawdown (BCE1) He has no LTA protection and no previous BCEs, so this uses up 96% of his LTA. MAY 2018 Forrest transfers to a QROPS at age ,000 value of drawdown fund His remaining available LTA is 4% of 1.25 million, or 50,000. His drawdown fund value has increased by 74,000 since BCE 1. Therefore, he has a 24,000 excess over his remaining available LTA and his provider deducts a 25% LTA charge of 6,000. He s not caught by the overseas transfer charge, so his UK provider transfers 968,000 to his QROPS. 11

13 OVERSEAS TRANSFER CHARGE The March 2017 Budget introduced a 25% overseas transfer charge, which applies to transfers to QROPS that don t meet at least one of the following exemptions: The individual is tax resident in the same country as the one in which the QROPS is established. The individual is tax resident in the European Economic Area (EEA) and the QROPS is established in the EEA. The QROPS is provided by the individual s employer. The QROPS is an overseas public service scheme and the member is employed by one of the participating employers. The QROPS is an international organisation s pension scheme and the member is employed by that international organisation. Examples of international organisations include the European Union and United Nations, but not multinational companies. The QROPS is an occupational pension scheme and the member is employed by the scheme s sponsoring employer. Example June 2018 Iris moves to Germany to start a new job Iris is 51 years old, employed by a UK company and a member of its group personal pension. She moves to Germany to start a new job in June She also has family connections in Germany and plans to retire there. She transfers her UK pension to a German QROPS in October She meets the conditions for no overseas transfer charge to apply. The overseas transfer charge can also apply if someone is exempt when they first transfer to a QROPS, but their circumstances change during the relevant period of five full tax years following the date of the transfer so that none of the exceptions applies. In this situation, the overseas transfer charge applies even if the receiving scheme has lost its QROPS status. On the other hand, the overseas transfer charge is refunded if it s applied at the outset, but at least one of the exceptions becomes applicable during the relevant period. October 2018 Iris makes her QROPS transfer Iris makes her QROPS transfer in October 2018, so her relevant period runs to 5th April That is, October 2018 to 5th April 2019, plus the five full tax years 6th April 2019 to 5th April The 25% charge means some clients moving to non-eea countries with no QROPS will have little choice but to leave their pensions in the UK. June 2023 Iris is offered a secondment to a non-eea country It s even possible that a client with a genuine reason for transferring, where a suitable QROPS is identified, could be trapped by an unexpected change of circumstances. Following a takeover of Iris s German employer in June 2023, she s offered a secondment to a non-eea country with no QROPS. If she takes up the offer and relocates, she ll become tax resident in the new country before 5th April If this happens, her German QROPS will have to apply the overseas transfer charge. 12

14 The transferring UK pension scheme must carry out the BCE 8 LTA check and calculate any LTA charge before calculating any overseas transfer charge. If both charges apply, the scheme calculates the overseas transfer charge on the value of the fund available for transfer after deducting the LTA charge. Example Leif considers transferring his 1.2 million uncrystallised personal pension to a QROPS in July He has 1.03 million available LTA and isn t eligible for fixed or individual protection. His circumstances mean the overseas transfer charge would apply. LTA charge: 1,200,000 1,030, ,000 25% 42,500 Overseas transfer charge: 1,200,000 42,500 LTA charge 1,157,500 25% 289,375 If he goes ahead, the amount that could be transferred to the QROPS after deducting the LTA and overseas transfer charges would be just 868,

15 Section 3 Test your knowledge a) A client aged 50 transfers their uncrystallised UK pension to a QROPS in July They meet the conditions for no overseas transfer charge to apply. They ve made no previous BCEs and have no LTA protection. The transfer value is 1.2 million. How much does their UK provider transfer to their overseas provider? i) 1,200,000 ii) 1,150,000 iii) 920,000 iv) 1,157,500 b) A client aged 55 transfers their uncrystallised UK pension to a QROPS in May An overseas transfer charge applies. They ve previously used up 15% of their LTA by taking a series of UFPLSs and have no LTA protection. The transfer value is 870,000. How much does their UK provider transfer to their overseas provider? i) 652,500 ii) 648,750 iii) 870,000 iv) 859,000 c) A client aged 60 transfers their uncrystallised UK pension to a QROPS in March An overseas transfer charge applies. They ve previously used up 10% of their LTA by taking a series of UFPLSs and have no LTA protection. The transfer value is 922,000. How much does their UK provider transfer to their overseas provider? i) 691,500 ii) 922,000 iii) 687,375 iv) 916,500 14

16 4. TRANSFERRING OVERSEAS PENSIONS TO THE UK INDIVIDUALS COMING TO WORK IN THE UK, OR RETURNING TO THE UK AFTER WORKING OVERSEAS, MAY WISH TO TRANSFER OVERSEAS PENSION BENEFITS TO THE UK. WHETHER THIS IS POSSIBLE WILL DEPEND ON THE OTHER COUNTRY S LEGISLATION, THE OVERSEAS SCHEME S RULES, AND THE CHOSEN UK SCHEME S RULES. BASIC REQUIREMENTS It s legislatively possible for a UK pension scheme to accept a transfer in from any overseas pension scheme. For these purposes, the generic definition of a pension scheme in section 150 (1) of Finance Act 2004 applies not the more stringent ROPS rules. S150 (1) Finance Act 2004 In this Part pension scheme means a scheme or other arrangements, comprised in one or more instruments or agreements, having or capable of having effect so as to provide benefits to or in respect of persons a) on retirement, b) on death, c) on having reached a particular age, d) on the onset of serious ill-health or incapacity, or e) in similar circumstances. A transfer in from an overseas scheme that meets this definition won t be treated as a new contribution. So it won t receive UK tax relief or count towards the member s annual allowance. However, the benefits will be tested against the member s LTA on any subsequent BCEs. LTA ENHANCEMENT RECOGNISED OVERSEAS SCHEME TRANSFER FACTOR If the transfer to the UK takes place after 5th April 2006, and the overseas scheme meets the ROPS criteria, the member might qualify for an enhanced LTA via the recognised overseas scheme transfer factor. The enhancement factor calculation includes a deduction for any relevant relievable amount. In simplified terms, this is the total of any contributions or accrual relating to tax years from 6th April 2006 in which the individual was a member of the overseas scheme while not being a relevant overseas individual. As a reminder, someone is a relevant overseas individual for a tax year if one of the following applies: they are not a relevant UK individual or they are a relevant UK individual only because they have been UK tax resident at some time during the previous five tax years and when they became a member of the pension scheme and they are not employed by a UK tax resident employer. Some products marketed as overseas pension schemes are closer to regular premium offshore life insurance bonds and if they don t meet the s150 (1) FA 2004 definition of a pension, it s not possible to transfer these funds into UK pensions any received funds would be treated as new contributions. 15

17 If there s no relevant relievable amount to take into account, the enhancement factor is calculated as: transfer value standard LTA at transfer date Example Meadow leaves the UK for Ireland on 19th July 2013, starts working for an Irish employer and joins its money purchase ROPS on 6th March She becomes a relevant overseas individual from 6th April Meadow stops working for her Irish employer on 1st January 2017 and the last member and employer contributions to the Irish ROPS are made in the 2016/17 tax year. Meadow then returns to the UK on 12th April 2017 and ceases to be a relevant overseas individual from 6th April Meadow transfers 200,000 from her Irish ROPS to a registered UK pension scheme during 2017/18 when the standard LTA is 1 million. Her recognised overseas scheme transfer factor is calculated using the LTA for 2017/18, the tax year of the transfer: Recognised overseas scheme transfer factor: 200,000 1 million 0.2 If there is a relevant relievable amount, the enhancement factor is: transfer value relevant relievable amount standard LTA at transfer date Example Orion is working in Ireland for an Irish employer when he joins its defined benefit ROPS on 6th March He comes to work in the UK on 6th May 2015 and ceases to be a relevant overseas individual from 6th April He s entitled to 33,000 a year under the Irish DB ROPS as at 6th April ,000 x 20 = 660,000. Orion returns to work in Ireland on 6th May 2017 and becomes a relevant overseas individual again from 6th April He s entitled to 60,500 a year under the Irish DB ROPS as at 6th April ,500 x 20 = 1.21 million. Orion transfers 1.21 million from his Irish ROPS to a registered UK pension scheme on 6th June His relevant relievable amount is 1.21 million - 660,000 = 550,000. His recognised overseas scheme transfer factor is calculated as transfer value in 2018/19 - relevant relievable amount / LTA for 2018/19: Recognised overseas scheme transfer factor: 1.21 million 550, million 0.64 If someone wants to take advantage of the recognised overseas scheme transfer factor, they have to notify HMRC on form APSS 202 by no later than five years after the 31st January following the end of the tax year in which the transfer took place. For more information on the recognised overseas scheme transfer factor, see HMRC s Pension Tax Manual starting from PTM

18 TRANSFERS BACK INTO UK PENSIONS FROM QROPS AND EX-QROPS Some people who transfer UK pensions to QROPS later wish to transfer their funds back to the UK. If the member does transfer back to a UK pension scheme, all the normal BCEs apply to the member from then on, even though their remaining available LTA will have been reduced by the BCE 8 test when they transferred their benefits to the QROPS. If the member has already started taking benefits from the QROPS, their replacement UK provision must be on a new for old basis, with their UK provider setting up drawdown or a scheme pension that mirrors their existing QROPS-based pension entitlements. They can t receive any tax-free cash in connection with the UK provider setting up this replacement provision. This new for old treatment doesn t apply to any BCEs. If the member is under 75, BCE 1 applies to their replacement drawdown, and BCE 2 applies to any replacement scheme pension. If the transferring QROPS or former QROPS is still a ROPS, the member can benefit from the recognised overseas scheme transfer factor explained above. This might mitigate any LTA charge they incurred under BCE 8 when they transferred to the QROPS. Example Pearl transfers to a QROPS using up 80% of the standard LTA at that time. She later transfers 900,000 back from the QROPS to a UK pension in 2016/17 when the standard LTA is 1 million. She didn t accrue new benefits in the QROPS so there s no relevant relievable amount. Pearl can claim a LTA enhancement factor of 0.9, calculated as: ( 900,000 0) 1million 0.9 Pearl s UK pension funds grow and she crystallises 1.2 million in 2018/19 when the standard LTA is 1.03 million. Her available LTA is calculated as enhanced LTA - LTA used up by previous BCE 8: 1,957,000 (1.9 x 1.03 million) 824,000 (80% of 1.03 million) 1,133, million million = 67,000 excess subject to the LTA charge. This will be at 25% or 16,750 if she designates the excess for drawdown. The charge is at 55% or 36,850 if she takes it as a lump sum. However, if the transfer occurs when the overseas scheme has ceased to be a QROPS because it s lost its ROPS status, the LTA enhancement isn t available and the member could suffer a double LTA charge as a result. The member will have used up LTA on BCE 8 when they transferred to the ROPS and will do so again when they crystallise benefits in the registered pension scheme. Example River transferred to a QROPS using up 80% of the standard LTA. Later on, the overseas scheme ceases to be a QROPS by losing its ROPS status. River transfers 900,000 back to a UK pension in 2016/17 when the standard LTA is 1 million. As the overseas scheme is no longer a ROPS, River can t claim any LTA enhancement factor. River s UK pension funds grow and he crystallises 1.2 million in 2018/19 when the standard LTA is 1.03 million. His remaining available LTA is: 1.03 million 20% 206, million 206, ,000 excess subject to LTA charge if excess is designated for drawdown: 994,000 25% 248,500 if he takes it as a lump sum 994,000 55% 546,700 IORP If a member requests a transfer out of some EU pensions, the existing scheme will request confirmation that the proposed receiving UK scheme is an Institute for Occupational Retirement Provision (IORP) within the meaning of the EU Pensions Directive. Most UK schemes will be. It s possible to check this on the Register of Institutions for Occupational Retirement Provision maintained by the European Insurance and Occupations Pensions Authority (EIOPA). 17

19 Section 4 Test your knowledge a) What s the key difference between a transfer to the UK from a scheme that meets the criteria in s150 (1) FA 2004 but isn t a ROPS and a transfer in from a scheme that s also a ROPS? b) What s the significance of any relevant relievable amount and how is this determined? c) What are the key LTA considerations if a member aged under 75 transfers uncrystallised UK pension scheme funds to a QROPS, then transfers them back to the UK before moving into drawdown still under age 75? 18

20 ANSWERS TO SECTION QUESTIONS 1a) There are no UK legislative barriers to a French national living in France but working in the UK joining a UK pension scheme. If they want to join a contract based scheme e.g. a PPP or GPP the provider will need to be authorised under financial services regulations to do business with members habitually living in France. If they want to join an occupational scheme, the scheme rules will determine if they re eligible. In all cases, it will also depend on the provider s own business acceptance criteria. The potential member should also seek advice on the consequences under French tax and pensions rules. 2a) They can make a tax relievable contribution up to the greater of 3,600 gross or their relevant UK earnings for the last tax year in which they re UK resident. They can make member contributions of up to 3,600 gross ( 2,880 net) for the next five tax years and benefit from tax relief even while remaining non-uk resident. They can benefit from employer contributions for an unlimited time while remaining non-uk resident. A UK based employer can get tax relief on its contributions if they re wholly and exclusively for a business purpose. 2b) They can make a tax relievable contribution up to the greater of 3,600 gross or their relevant UK earnings for the last tax year in which they re UK resident. They can t normally make any tax relieved member contributions in later tax years while they re non-uk resident unless their OPS offers relief at source. They can benefit from employer contributions for an unlimited time while non-uk resident. A UK based employer can get tax relief on its contributions if they re wholly and exclusively for a business purpose. 2c) The member needs to be a relevant overseas individual which means their employer can t be UK tax resident. And they need to have made or benefitted from non-tax relieved contributions to a UK pension scheme while being a relevant overseas individual. 3a) (iv) 1,157,500 1,200,000 fund value - 1,030,000 LTA for 2018/19 = 170,000 excess. BCE 8 LTA charge is 170,000 x 25% = 42,500. 3b) (i) 652, ,000 fund value - 875,500 remaining available LTA for 2018/19 = 0 excess BCE 8 LTA charge is 0 Overseas transfer charge is 870,000 x 25% = 217,500 19

21 3c) (iii) 687, ,000 fund value - 900,000 remaining available LTA for 2017/18 = 22,000 excess BCE 8 LTA charge is 22,000 x 25% = 5,500 Overseas transfer charge 922,000-5,500 x 25% = 229,125 4a) It s possible to transfer funds into a registered UK pension scheme from any overseas scheme that meets the s150 (1) FA 2004 criteria. If the overseas scheme also meets the criteria to be a ROPS, the member may be able to claim a LTA recognised overseas scheme transfer factor. As funds from both types of transfer will be tested against the member s LTA when they later have a BCE on crystallising funds and/or reaching age 75, this potentially provides an advantage where the transferring scheme is a ROPS. 4b) If a member qualifies for an LTA recognised overseas scheme transfer factor, there s an adjustment for any relevant relievable amount. In simplified terms, this is the total of any tax relievable contributions made to a ROPS by or on behalf of the member in any tax years in which the member was not a relevant overseas individual. 4c) BCE 8 applies when the member transfers to a QROPS this will use up a percentage of their available LTA at the date of the transfer. If they transfer QROPS funds back to the UK before crystallising into drawdown, their remaining available LTA for BCE 1 is reduced to take account of the previous BCE 8. They can normally claim an LTA enhancement (recognised overseas scheme transfer factor) to mitigate this double charging effect. But this isn t possible if the overseas scheme has ceased to be a ROPS before they transfer back. 20

22 Scottish Widows Limited. Registered in England and Wales No Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number (IP) 08/18