Moving from a QROPS
The potential for moving pension rights back to the UK has become somewhat of a hot topic. Given the complexities of UK tax legislation, one of the many things advisers need to be aware of is the impact this could have on their clients’ lifetime allowance.
A transfer of an individual’s rights under a registered pension scheme (RPS) to a qualifying recognised overseas pension scheme (QROPS) is treated as an authorised payment, provided certain conditions are met. This concession is designed to allow those individuals who plan to retire overseas to move their pension rights with them. The abuse of this concession where QROPS were being marketed as a way of gaining a tax advantage led HMRC to tighten up the legislation covering such transfers. This, combined with the pension freedoms introduced in 2015, has lessened the appeal of QROPS somewhat. For individuals who decide to come back to the UK to see out the remainder of their retirement or those, who because of the pension freedoms, want to transfer their pension rights back to an RPS – what are the lifetime allowance implications?
If the individual is under age 75 at the time of transfer, the transferred rights which are now in an RPS will at some point be tested against the individual’s lifetime allowance (LTA).
This also applies where the rights transferred include a pension in payment. In the case of drawdown rights, a lifetime allowance test is triggered through benefit crystallisation event (BCE) 1 as soon as the individual becomes entitled to the replacement drawdown rights under the RPS.
On transferring rights from a QROPS to an RPS the individual may be able to apply for an LTA enhancement factor to offset any potential LTA issues.
Leo was a member of an RPS and transferred uncrystallised rights worth £1.4m from an RPS to a QROPS in February 2010. At the time of transfer, he was aged 63, had no form of LTA protection and had 100% of his LTA remaining.
2009/10 BCE 8: £1.4m/£1.75m = 80%
In the 2013/14 tax year he fully vested the benefits under the QROPS, taking a lump sum and designating the remainder for the UK equivalent of capped drawdown. Leo did not engage in any pension funding under the QROPS. Therefore, the taking of benefits under the QROPS did not trigger an LTA test.
On 1 February 2020 (aged 73), he transferred all the remaining drawdown rights from the QROPS to a SIPP in the UK. He still has no form of LTA protection and the amount transferred was £896,750.
2019/20 BCE 1:
Recognised overseas transfer factor = £896,750/£1.055m = 0.85
LTA = £1.055m + (£1.055m x 0.85) = £1,951,750
LTA headroom = £1,951,750 – (80% of £1.055m) = £1,107,750
The amount crystallised is £896,750 (85% of the 2019/20 standard lifetime allowance). Therefore, there is no LTA charge to account for.
Leo will attain age 75 in the 2021/22 tax year. Assuming no change in legislation, and he survives, the test at that age would be carried out as follows.
2021/22 BCE 5A:
Assume the standard lifetime allowance at that point is £1.1m.
LTA = £1.1m + (£1.1m x 0.85) = £2.035m
LTA headroom = £2.035m – (165% of £1.1m) = £220,000
If the drawdown fund at that point exceeds £1,116,750 (£896,750 + £220,000), then the excess will attract an LTA charge at 25%.
But what if the transferring individual has one of the forms of LTA protection, would such a transfer result in the loss of protection?
For primary and the individual protections (IP14 & IP16), the transfer presents no problem.
However, for enhanced and the fixed protections (FP12, FP14 & FP16) the rules covering the cessation of protection still apply.
For example, the setting up of a new arrangement under the RPS must come within the permitted circumstances criteria if protection is to be maintained.
Where the receiving arrangement is money purchase (not cash balance) loss of protection should not be a problem unless the transfer includes pension credit rights. Such rights may be treated as a contribution made on behalf of the individual resulting in the loss of protection.
Where the receiving arrangement is an existing defined benefits or cash balance arrangement, protection will be lost if the transfer generates benefit accrual under the receiving arrangement. Benefit accrual under a defined benefits or cash balance arrangement is not triggered by a contribution, but by benefit accrual exceeding a prescribed limit. The benefit accrual test for enhanced protection differs from that for the fixed protections.
The moving of pension rights back to the UK has become a popular topic for discussion with some advisers and this article provides insight into the move from the viewpoint of the LTA. An important consideration, but not the only one.