Background on ROPS
It is a designation by Her Majesty’s Revenue and Customs (HMRC) that a Recognised Overseas Pension Scheme (ROPS), itself a UK Treasury designation, will accept transfers from UK pension schemes without those transfers being considered a benefit crystallisation event.
What does this mean?
Well, simply speaking, if you have a UK pension and no longer live in the UK, you can transfer your UK pension to any scheme that’s a QROPS and this can be done free of any tax liability on transfer.
Importantly, this means that you don’t have to transfer to a scheme in the country in which you happen to be living but can choose a jurisdiction with pension/pension tax rules which could be more beneficial.
Clearly, if you’re operating an SMSF, then strict SMSF residency rules still apply with any breach resulting in penalty tax at the marginal rate of 49 per cent.
What happens if you lose your Q?
On 1 July 2015, HMRC published their ‘list’ resulting in more than 1,600 Australian QROPS losing their qualifying status. This applies to SMSFs and to superannuation funds run by others, except for the Local Government Superannuation Scheme. The Australian jurisdiction for QROPS transfers was effectively delisted as a result.
HMRC have indicated that no Australian fund would be able to comply with the new QROPS requirements due to the overarching legal framework in Australia. Funds may now only qualify if no access (under any circumstances) is allowed before age 55. The difficulty is that Australian law allows some limited access, for example, due to severe financial hardship and/or compassionate grounds.
These new requirements (specifically the pension age test which seeks to restrict anyone under the age of 55 from accessing QROPS funds) were effective from 6 April 2015 and have resulted in an 82 per cent reduction in the number of qualifying schemes globally, with more than 3,000 registered pension schemes being suspended and the loss of eight international jurisdictions in total.
If a UK pension scheme is transferred to an Australian super fund that is not a QROPS penalty tax, up to 55 per cent of the amount transferred can apply.
It is ultimately the responsibility of the member to determine whether or not their receiving scheme complies with QROPS regulations. However, a good SMSF administrator will certainly be up to date with the latest developments, have knowledgeable staff and be able to help you join the Q with the ROPS.
A new hope
Some hope has recently arisen when HMRC added an Australian superannuation fund to the QROPS list. It appears this fund may only accept members who are already over 55, thereby eliminating the UK concerns on early release.
The latest HMRC ROPS list saw the addition of 10 more Australian superannuation funds bringing the total number of schemes to over 60. The list continues to exclude schemes that are open to the general public. The list is comprised of five public service funds (exempt from the recent legislation changes) and the remainder are over 55 SMSFs.
So, is it still for you?
If you’re moving away from the UK soon or are already overseas, you should fully explore whether you’re able to transfer your UK pension into a ROPS. There are several requirements if you want to take advantage of this option including:
- Your pension must have a transfer value in excess of £25,000 or £100,000 if you live in the US;
- You must be between the ages of 18 and 75;
- Your pension must be private or occupational – state pensions cannot be transferred;
- You must not have already taken an annuity;
- If you have a final salary pension scheme you must not have already taken payment;
- You are living abroad or will be moving abroad in the next six months.
Each pension transfer is as individual as you are, so it’s important for you to obtain specialist independent advice and to work with a competent administrator to help you step through the process.
A correctly drafted trust deed is required as it needs to satisfy the HMRC. There are only a small number of capable specialists operating in this area, so again it’s important to ensure the checklist of items is performed in the correct sequence from the outset.
While all very achievable as with most things, some pre-planning and discussions need to take place. The outcome of these will be a clear timeline of required events with all parties playing their role. While six months is a long time, there’s lots to do and much coordination necessary.
What happens next? And some further rules to consider.
Generally speaking, and provided the money or assets transferred are received by the Australian superannuation fund within six months of the start of your tax residency in Australia, the increase in value of the fund to the time of transfer will not be taxed.
Conversely, an Australian tax liability may arise where a member transfers or receives a lump sum from a foreign pension scheme six months after the member has become a tax resident of Australia.
A direct transfer of all entitlements in a foreign pension scheme allows the member to elect to include any taxable growth amount in the superannuation fund’s assessable income, rather than their own. This provides a tax advantage if the member’s marginal tax rate is higher than the fund’s tax rate of 15 per cent. Members who transferred UK pension funds should not withdraw a lump sum or commence a pension from the Australian QROPS if they have been a resident of the UK in the last five UK tax years. This will eliminate any potential UK tax charges on the payment of the benefit.
UK reporting requirements
Just when you thought we were done, the HMRC has a number of ongoing QROPS reporting rules which state that a scheme manager or the trustees will have to notify them if:
- a payment from the SMSF is made within 10 years of the day of the transfer from the foreign pension fund; and
- the member is a person to whom the member payment provisions apply
The member payment provisions do not apply unless:
- the member is a resident in the UK when the payment is made (or treated as made); or
- although not resident at that time, has been resident in the UK earlier in the tax year the payment is made or in any of the five tax years immediately preceding that tax year
So, in most cases, the reporting period has been extended to 10 years after the transfer has been made. Unauthorised payments should not be made in this time, otherwise a charge will be levied on the member.
As such, it may be advantageous to limit this impact by transferring any UK pension benefits into a separate SMSF and electing to contribute the taxable growth into the SMSF.
A member may elect to contribute the taxable growth or applicable fund earnings of the foreign pension scheme into the fund rather than include it in their individual assessable income and taxed at their marginal tax rate.
Once a written choice has been made to include the taxable growth in the fund, the member cannot revoke their choice and be assessed on the amount in their personal assessable income – see ATO ID 2012/27.
To be able to make an election, the whole of the lump sum must be paid directly from the foreign pension scheme into the SMSF and the individual can no longer have an interest in the foreign super fund immediately after it is paid.
While a detailed discussion is beyond the scope of this article don’t forget to consider the following factors:
- UK financial limit, for example, lifetime allowance test
- Australian financial limit, for example, annual contributions caps, brought forward limit
- Australian age limits, for example, contribution rules, work test
Paul May, general manager, Novo Super