Looking to retire on a sunny beach, are you? Congratulations! Moving your UK pension to Australia could be financially beneficial too. Let’s go over the basics of why you’d want to do that, how to do it, and what to watch out for.
If you are moving your UK pension to Australia, it may be beneficial to firstly look to move it into a QROPS, or Qualifying Recognised Overseas Pension Scheme. These are pension schemes that have been recognised by Her Majesty’s Revenue and Customs – HMRC as being ‘comparable’ to UK pensions and therefore eligible for transfers.
The benefit here is that QROPS sometimes offer broader investment and lower taxes than UK pensions. Specifically, in Australia, superannuation funds (which is what pensions are called there) have quite attractive tax treatment. First, it’s mostly the contributions that are taxed, at rates of 15% or a marginal rate of 30% (for those earning more than $300,000 per year), and with some room for extra tax-exempt contributions. And withdrawals are tax-exempt for those over the age of 59 (or pay 17% to 22% tax before that). As compared to income tax of up to 45% in the UK, that’s fantastic, right?
How to avoid 55% tax when transferring a UK pension to Australia
The problem is that some jurisdictions had pension rules that were so much more attractive than those in the UK – either because they were specifically trying to attract investment from UK retirees, or, as in the case of Australia, simply because that’s how the local rules were in the first place – that HMRC in turn determined they were not comparable to UK pensions and de-listed them.
That happened all over the world, but perhaps nowhere more than in Australia, where nearly 1,600 plans were de-listed virtually overnight because they allowed pensioners to withdraw funds in certain situations before the age of 55. By 2015 transferring a UK pension to Australia an expensive problem.
De-listing is a problem because if you transfer your funds from a UK pension to Australia and into a scheme other than a QROPS, you may pay 55% tax. Ouch! Of course, since then, some Australian schemes have adjusted in order to be compliant with HMRC requirements. But those that were mainly set up for Australians have not. So you must make sure you transfer into an appropriate pension scheme.
Also, you must also make sure you are not tax-resident back in the UK. The main rules for this are having lived outside the UK for five years, without having spent 6 months of any given year, or an average of more than 3 months per year over the past 4 years in the UK. But watch out! Those are not the only rules, and in certain situations you may still be tax-resident in the UK even if you satisfy them. It’s best not to make assumptions – check with a specialist.
There are also a few restrictions on who can transfer. UK state and government pensions cannot be transferred, nor can pensions in which an annuity has been purchased or payments have begun.
Now, remember that Australian pension contributions are taxed? Well, if you transfer into an Australian fund within 6 months of having established residency there, there is no tax. But if you have been resident for over 6 months, then you do have to pay 15% tax on your transfer, as in the case of a normal contribution.
Remember, also, that even though you are moving to Australia, you don’t necessarily have to set up your QROPS there. Jurisdictions such as Malta and the Isle of Man allow you to set up a QROPs there and live elsewhere, which depending on your specific situation might be more convenient.
All in all, moving your UK pension to Australia could be beneficial from a tax perspective, as long as you avoid some tax mistakes that could be very expensive. It’s a good idea to talk to a financial advisor who is experienced in moving a UK pension to Australia.