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Overseas pension transfers in doubt as ‘minefield’ forms
While setting up an SMSF was previously a viable option for transferring UK pension funds to Australia, additional hurdles with the total superannuation balance and non-concessional contributions mean this may no longer be the case, says a technical expert.
Speaking to SMSF Adviser, Fitzpatricks Private Wealth head of technical services Colin Lewis said that since April 2015, UK expats have only been able to transfer their pension funds to a foreign pension fund, including Australian super funds, if that fund is a qualifying recognised overseas pension scheme (QROPs).
While none of the public offer funds meet the rules required for obtaining qualifying status, Mr Lewis explained, SMSFs are able to qualify where the membership is restricted to 55 plus.
The reduction in the non-concessional contribution cap and restrictions on making non-concessional contributions were someone’s total superannuation balance exceeds $1.6 million or close to $1.6 million have created some hurdles, however, he explained.
Last year, there were further changes made by the UK government when they introduced a transfer tax for certain pension money transfers to QROPs.
The changes mean that there will be 25 per cent transfer tax unless one of the relevant conditions is met. One of the relevant conditions is that their QROP and their residency correspond.
“What you could have done up until April last year, if you had a contribution cap issues, is transfer the funds to a QROP in Malta and then drip feed it out to Australia within the contribution caps over time,” he said.
“Then in April last year, the UK said that if you were releasing funds to a QROP in a country where you are not a resident, there will be a 25 per cent penalty tax on it. So that ability to drip feed it out has really been closed - no one would pay 25 per cent tax for the privilege.”
While Mr Lewis said he continues to receive enquiries about setting up SMSFs to address the issues with the restrictions on transferring UK pension funds across, the changes to non-concessional contributions mean this may no longer be worthwhile, as it’s only possible to transfer a maximum of $300,000.
“NCCs are such a minefield now. You’ve got the threshold test to start with before you can even contemplate making an NCC and then, depending on how close you are to the $1.6 million, that will affect how much of the bring-forward you’ve got,” he said.
While expat clients will have to contend with foreign currency and those sorts of aspects if they’re receiving a UK pension, it may not be that bad, he said.
“The only issue of course is that it’s not tax-free like it would have been if it had been moved into the system here,” he said.
Miranda Brownlee
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.
The person can keep the whole 15% taxable component of the QROPS transfer and consider the use of an excess non-concessional contribution strategy for the balance of the monies. The person will be older than 55 and so HMRC will not regard the refund as an "unauthorized payment". Indeed these transfers have now become a lot easier than the old drip feed days.0- The usual way to drip feed so that the transfers are all within the non-concessional contribution cap (if this is suitable for the client's personal circumstances) is to use a UK Self Invested Personal Pension (SIPP). This option is still available and works well, so I don't understand the reference to Malta.
Since 1 July 2017 Australian super funds have been able to accept contributions exceeding the cap (ultimately however, the excess + 85% of the associated earnings will be released to the member and there is further tax to pay on this). Although this has to be planned carefully, it is now common and works well.
The 25% overseas transfer charge is not a "penalty". Defined contribution pension savings in the UK will have been accumulated with the advantage of considerable tax concessions (annual contributions are tax deductible and not taxed on receipt by the fund, also zero tax on income within the fund). The 25% charge does not apply if the pension savings are transferred to the country to which the migrant has decided to move - which seems quite fair in those circumstances.
I would also point out that the requirement that the transfer must be to a QROPS has been in place since 2006 and not 2015 as suggested.0- Good clarification Andy, oops I mean anonymous!
Also there is one other alternative option outside the SMSF space. The Australian Expatriate Superannuation Fund (AESF) is a retail Superannuation fund opened to facilitate and accept foreign pension transfers into Australian Superannuation for people over 55 only. Not recommending it but just clarifying their is another option0
- There is so much more to this. For QROPs, a SMSF is an absolute must as the growth in the UK pension from the date of residency is assessable income of the recipient pursuant to section 305-70 of the ITAA 97. However, this assessable income can be transferred to the Trustee of the SMSF - section 305-80(2). Importantly this amount is not a concessional contribution - section 291-25(2) nor a non-concessional contribution - section 292-90(2). For UK pension members who have been an Australian resident for a long time this is a great option. Always check the law is motto.0
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