Overseas - opportunities for personal pension members
The UK workforce has become increasingly mobile in recent years and the opportunity for overseas travel, for work or in retirement, is now within reach of many of us. You may have clients who spend part of their working lives overseas, or who take advantage of warmer climates and leave the UK for some or all of their retirement. These clients may be taking a close look at their UK pension arrangements – considering their on-going eligibility or opportunities to pay additional contributions if they cease to be UK resident. Others may wish to transfer their existing pension funds held within or outside the UK - regardless of their age or proximity to retirement. This article considers some of the queries which may be raised by your personal pension clients, before or after they leave the UK.
Facts and analysis
You may have clients who are no longer UK resident or who expect to leave the UK at some time in the future. These client still need to consider their short and long term plans when deciding what to do with any existing UK pension arrangements
- If your client does not have any existing pension arrangements, they may want to establish a personal pension plan while they are still UK resident. This option may not be available after they have left the UK.
- If they are leaving the UK for a short time, or are not sure of their long term plans, they may be able to continue paying contributions to their existing UK pension arrangement and benefit from basic rate tax relief for up to five tax years.
- Your client may leave their pension fund ‘paid-up’ in the existing UK pension scheme until they are able to recommence contributions or take retirement benefits, or they decide to transfer to a different pension scheme at a later date.
- They will also need to consider the tax implications of any decisions they make.
- If your client does not intend to return to the UK, a transfer to a suitable overseas pension scheme may be the right choice for them.
Whatever your client decides – they are likely to need some financial advice!
What if your client does not have an existing UK personal pension plan?
- Any decisions about starting a UK personal pension plan will normally need to be made before your client ceases to be a UK resident. This is because providers may restrict the availability of new personal pension business to individuals who are UK resident when they join the pension scheme.
- Joining a scheme while UK resident also secures entitlement to tax relief on member contributions paid to the new pension plan for a further five tax years after the member has left the UK.
- If your client leaves this decision until after they have left the UK, this option may no longer be available to them, although provider and product requirements can vary.
Will UK tax relief be available on contributions paid after your client has left the UK?
- An individual will be entitled to tax relief on their pension contributions if they meet the HMRC definition of a ‘relevant UK individual’. This generally means:
- they have earnings chargeable to UK income tax for that tax year, or
- they were resident in the UK at some time during the five tax years before the contributions are paid, and when they joined the pension scheme.
- This means, your client may benefit from basic rate relief on their contributions for at least five tax years after the tax year in which they ceased to be UK resident. UK tax relief is only available if your non-UK resident client’s contributions are paid to a ‘relief at source’ pension scheme. As a general rule of thumb, personal pension schemes are usually run on a relief at source basis. Occupational pension schemes, buyout plans and retirement annuities are not.
How much can your client contribute to their UK pension plans?
A ‘relevant UK individual’ is able to contribute up to a total of 100% of their relevant UK earnings or £3,600, if higher, to their UK pension plans each tax year.
- Before leaving the UK
Clients who will not continue to have relevant UK earnings while overseas may wish to maximise their pension savings before they leave the UK, Annual Allowance/Money Purchase Annual Allowance/Tapered Annual Allowance permitting.
This means your client is able to pay up to 100% of their relevant UK earnings to their personal pension plan in the tax year in which they leave the UK (assuming they are not also contributing to any other UK pension arrangements). Although, bear in mind that pension income, or income from dividends or other investments, may not be used in place of relevant UK earnings to support tax relievable pension contributions.
If your client has no relevant UK earnings at that time - they can still contribute up to £3,600 (gross) and benefit from basic rate tax relief, based on their UK residency for that tax year.
- After leaving the UK
How much your non-UK resident client may contribute, and how long for, will depend on their individual circumstances. Also, the requirements of different providers and products will vary.
If your client has no relevant UK earnings
- Your client will be able to continue paying contributions to their existing UK personal pension plan while they remain a ‘relevant UK individual’. This means they may benefit from basic rate tax relief for up to five tax years after leaving the UK.
- Member contributions are capped at £3,600 (gross) each tax year during the five year period. As long as the contributions are paid to a relief at source pension scheme, your client would continue to pay contributions net of UK basic rate tax - even if they are no longer a UK tax payer at that time.
- At the end of the five tax year period, your client will no longer meet the ‘relevant UK individual’ conditions and will cease to be eligible for tax relief on their payments. Your client’s pension scheme may be unable to cater for a gross member contribution. So, this means the member payments will usually need to stop when they cease to be a ‘relevant UK individual’.
- Member contributions may restart if your client returns to UK residency or starts to receive relevant UK earnings at some time in the future.
If your client continues to receive relevant UK earnings
- If your client continues to receive relevant UK earnings ie. their earnings are still taxed in the UK, then member contributions can continue on the same basis as before they left the UK. This means your client may contribute up to 100% of their relevant UK earnings or £3,600, if higher, each tax year, Annual Allowance/Money Purchase Annual Allowance/Tapered Annual Allowance permitting.
- Their employer can also continue to contribute to their existing UK personal pension plan, as the employer payments do not need to be supported by the member’s earnings.
- Bear in mind that a personal pension plan will usually need to be established before your client leaves the UK. Once they cease to be UK resident they may no longer be eligible for a new plan, even if they still receive relevant UK earnings.
- A ‘relevant UK individual’ is eligible for tax relief on the contributions they pay to a UK pension arrangement, but this does not also infer entitlement to a new UK personal pension plan (which may have other eligibility requirements linked to their residency when joining the pension scheme).
If relevant UK earnings cease
- During the five tax year period following the tax year your client left the UK
Your client may continue to pay up to £3,600 (gross) each tax year for the remainder of that five year period.
- After the five tax year period following the tax year your client left the UK
If earnings cease after the end of the five tax year period, your client will no longer be a ‘relevant UK individual’ and no further member contributions may be paid, unless they return to UK residency or start to receive relevant UK earnings again.
Does your client wish to contribute over the permitted £3,600 each tax year, or after the five year period has ended?
- As noted above, the ability for a non-UK resident to continue paying tax relievable contributions to their UK pension arrangement is restricted.
- As employer contributions are paid gross, it may be possible for these to continue in payment after the member contributions have ceased. e.g. while your client is on an overseas secondment, although, this option may not be available or suitable for your client.
Does your client want to consolidate their UK pension plans into one pension arrangement?
- If your client wishes to consolidate their existing pension provision into a new UK personal pension plan, this decision will normally need to be made, and action taken, before your client ceases to be UK resident. As noted, providers may restrict the availability of new personal pension business to individuals who are UK resident when they join the pension scheme.
- If the transfers are to a personal plan which was established before your client left the UK, transfers may generally continue to be accepted by that existing plan regardless of where your client is resident at the time the transfer is made, although, individual product restrictions may apply.
- If an overseas client would like to establish a new personal pension plan simply to accept transfers of existing UK pension funds, with no intention of paying further contributions, they would not need to be a ‘relevant UK individual’. ‘Relevant UK individual’ status relates only to the availability of tax relief on member contributions.
- However, whether your client would be able to establish a new UK personal pension plan for this purpose will depend on the client meeting the eligibility criteria for their selected plan. As previously noted, some schemes or providers may require a new member to be UK resident at that time
Are there any tax implications which need to be considered?
- Taxation of overseas investments
If your client leaves their UK pension funds in the UK, the UK taxation of these funds will not be affected by their country of residence or tax status.
However, some overseas tax authorities may levy a tax on their residents’ worldwide investments. As these investments may include a pension fund in a UK pension scheme, it is recommended that appropriate tax advice is sought both in the UK and in your client’s new country of residence
- The annual allowance tax charge
The annual allowance tax charge will apply if total pension savings exceed your client’s available annual allowance. Bear in mind that their available annual allowance may be increased by unused annual allowance carried forward from previous tax years.
Total pension savings will include contributions paid by your client, their employer or paid by a third party on their behalf, as well as the value of any accrual under defined benefit pension schemes.
This tax charge will apply regardless of who had paid the contributions or where your client was resident when the contributions were paid.
The Money Purchase Annual Allowance tax chargeYou can find more information in HMRC’s PTM056510 onwards PTM056510 - Annual allowance:tax charge:money purchase annual allowance: general.
The Taxation of Pensions Act 2014 (The Act) introduced the money purchase annual allowance.
The money purchase annual allowance of £4,000 is triggered where an individual flexibly accesses pension savings in a money purchase arrangement on or after 6 April 2015, this also includes flexibly accessing their benefits in an overseas scheme.
Bear in mind that there is no entitlement to carry forward unused annual allowance from a previous year to increase contributions into a money purchase arrangement if your client is subject to the money purchase annual allowance.
The money purchase annual allowance tax charge will apply if total money purchase pension savings exceed your client’s available money purchase annual allowance.
- The tapered Annual Allowance
From 6 April 2016, individuals who have income for a tax year of greater than £150,000 will have their annual allowance for that tax year restricted. For clarity, this means that the application of the tapered annual allowance is applied each tax year separately and hence an individual may have a tapered annual allowance in one tax year, and a full annual allowance in the following tax year depending on their income.You can find a detailed explanation in our Financial Planning Bulletin.
Is your client a Crown servant working overseas?
- A Crown employee, or their spouse or registered civil partner, will be considered a ‘relevant UK individual’ if the Crown employee has general earnings from their overseas Crown employment, regardless of their country of residence or whether their earnings are subject to UK tax.
- This means your client, or their spouse or registered civil partner, will be able to make tax relievable contributions to a UK pension scheme of up to £3,600 each tax year during their period of Crown employment. Higher contributions may be paid if they are supported by relevant UK earnings. As above, the contributions will benefit from basic rate tax relief if they are paid to a relief at source pension scheme, but will have the same Annual Allowance/Money Purchase Annual Allowance/Tapered Annual Allowance limits.
- A Crown employee, or their spouse or registered civil partner will usually be able to start a new UK personal pension plan regardless of their country of residence at that time, although, provider and product requirements can vary.
Does your client want to transfer their UK pension arrangement to an overseas scheme?
- We have covered this in detail in a separate article: ’Personal pensions - transfers to an overseas pension scheme’.
- Check whether you have any clients who are likely to leave the UK at some time in the future. These clients may wish to:
- maximise their contributions before they leave the UK,
- continue to pay tax relievable member contributions for as long as possible, or
- transfer to a suitable overseas pension scheme
Have your clients considered joining a UK pension scheme or starting a new pension plan before they leave the UK?
If your clients have already left the UK - check the eligibility requirements for different UK pension schemes, as some providers and products may restrict access for non-UK residents.
Clients continuing to contribute to a UK pension scheme while resident overseas will need to review their eligibility after five tax years – their contributions may need to stop at that time.
Clients wishing to transfer overseas may need assistance when looking for a suitable QROPS scheme to accept their transfer.
Although the above outlines some of the UK tax charges your client may encounter while resident overseas, we are not able to comment on the requirements of any overseas tax authorities or legislation, or overseas pension schemes. It is recommended that appropriate tax and/or legal advice is sought in both the UK and your clients’ new country of residence.
This information has not been approved for use with customers and is based on Aviva’s interpretation of current law and legislation, and our understanding of HM Revenue & Customs (HMRC) practice as at 6 April 2021. It is provided for general information purposes only and should not be relied upon in place of legal or other professional advice. Both the law and HMRC practice will change from time to time and our interpretation may be subject to challenge by HMRC or other regulatory body. Aviva cannot act as legal adviser for you or your clients. You should always seek appropriate legal or other professional advice. (Ref 1.12)