Recent changes impacting overseas pension transfers advice

HMRC statistics released in August confirmed that following a period of general malaise, more expats were once again taking their UK pensions abroad.

Differing views will be held on the factors that drove previous behaviour, the motives behind the change in trend and the outlook for the short-to-medium term. What is up for less debate, however, is how recent rule changes may shape your recommendations going forwards.

Before we get stuck into the landscape today let’s look back to the beginning of the latest significant reforms, starting with the removal of the lifetime allowance charge from 6 April 2023 and the abolition of the lifetime allowance from the start of this tax year.

Those changes, as we all know, saw the tax on pension savings crystallised above a prescribed level completely abolished. We also witnessed the lifetime allowance replaced with three newly-created substitutes, each with a different objective and (in some cases more than others) different rules attached.

The overseas transfer allowance, set to control transfers out of the UK pensions environment – or BCE 8 in old technical parlance – was set at the same monetary level as the lifetime allowance but on a standalone basis, so as not to interact with those restricting cash lump sums in the UK.

There were a couple of flaws with the transitional calculation where funds were either in payment prior to April 2006 or crystallised between then and April 2024. As this wasn’t the intention of the policy, and following feedback from industry, HMRC has revisited the calculation with the necessary adjustments made under the regulations passed in November.

Where a client has pre-2006 funds but has had no BCE, these will now reduce the OTA by 25% of a notional value obtained by multiplying the current annual pension amount by 25.

The more significant flaw was the double counting of funds designated to drawdown. Thankfully, these funds are now ignored when calculating available OTA.

Another amendment, announced within Rachel Reeves’ Budget, was the tightening of the exemption conditions relating to the overseas transfer charge. The one that’s gone is the ability for UK residents to transfer to a QROPS anywhere in the EU, the European Economic Area, or Gibraltar whilst not living in the same country.

During its existence, this inadvertently gave two bites of the tax-free cash cherry, one in the UK and one from a QROPS for those who had a large enough fund value and hadn’t fully crystallised prior.

HMRC has shrunk this loophole effective from 30 October unless a request had already been made to the trustee, which now needs to complete before 1 May 2025 to remain charge-free.

The amendment also affects individuals moving to one country and transferring their pension to a different country, so the strategy of retiring to France or Spain and joining a scheme established in Malta or Gibraltar will therefore have lost much of its shine.

It may be a worthwhile exercise to review your cases since April with the rules applied retrospectively. For example, anyone that has transferred overseas and incurred an overseas transfer charge may be able to claim funds back from HMRC. Plus, those who delayed transferring may now want to go ahead.