55% pension tax shock for expats

Sarah Coles
Sydney Skyline
Sydney Skyline

Pensioners who plan to move to Australia or New Zealand could be in for a horrible tax shock, if they want to transfer their pension to their new home. One of the unintended consequences of the new pension freedoms, introduced on 6 April, is that expats could face 55% tax on their entire pension pot.

Transferring pensions is reasonably common among expats, because Brits can contribute to a pension under the relative generosity of the UK rules, then transfer to a pension in their new home, and be taxed at a local rate on their income - which is often lower than in the UK. If they end up paying tax on the whole pot, the financial damage caused by the move will dramatically outweigh any potential tax benefit.

The problem has arisen because of a rule written into the new pension regulations, which insists that pension schemes must not allow people to withdraw any of their pension before the age of 55 - unless they are retiring early because of ill-health. A feature of pensions in Australia and New Zealand is that if you are suffering financial hardship, you can tap into your pension before the age of 55.

The Telegraph reported that this means that they are not considered to be a "qualifying recognised overseas pension scheme" by the UK's taxman, so UK nationals who transfer their cash into these pensions may be considered to have transferred it into an unrecognised scheme, and they could become subject to a 55% tax.

What should you do?

HMRC has written to pension companies in Australia and New Zealand, warning them of this stumbling block. It is hoping that the schemes will change their rules so that they qualify. However, one adviser, from Montfort International, told the Telegraph that this is unlikely.

Instead the schemes will probably work with the taxman in order to arrange an exemption. The problem is that this sort of thing doesn't happen overnight, so people retiring to Australia and New Zealand in the interim risk getting caught in a tax trap.

The experts are urging anyone who started this process after 6 April to halt it, until they either have confirmation from their new pension scheme that they qualify under the UK rules - or until an exemption is arranged. A transfer typically takes between three and four months, so it should still be possible to stop a transfer before it triggers a potential tax charge. Those who transferred their pension prior to the 6 April will not be affected.

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This is yet another stumbling block for pensioners retiring to these countries. In most cases they rely heavily on private and workplace pensions, not least because their state pensions are frozen when they move to Australia.

While state pensions in the UK are protected by a 'triple local', which ensures they keep pace with the cost of living, in Australia and New Zealand they are frozen, so that every year they become less and less valuable as they are eroded by inflation. It's not uncommon for an expat to see the purchasing power of their state pension halve during their retirement.

Expats are also one of the few groups of pensioners to have seen a benefits cut in the previous parliament - as a weather test was introduced on the Winter Fuel Allowance. As a result, those in warmer climates lost the benefit.

Pension reforms have been far-reaching, and were implemented relatively swiftly, so it's hardly surprising that there will be unintended consequences. In time, we can expect a mopping up of these anomalies and oversights, but in the interim it's up to the individual pension saver to ensure they get the advice and information they need to avoid falling foul of the rules and making a very expensive mistake.

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