John Goldie, Director of Paramount Wealth Management, shares more about the complexity of transferring pensions from the UK, than the word-limit of our "Ask an Adviser" response allows (see our Ask an Adviser published 17 Nov 2017, entitled "Ask an Adviser - UK Pensions and QROPS Changes" for more on this topic).
There is no simple way around it; the only way to be sure Pension transfers are done right is to get expert advice. Seeing a specialist in this area is vital.
We are trying to shift retirement savings between two different countries, and two totally distinct sets of legislation, both of which are constantly changing, and comply with both.
There is an array of questions that need to be answered before even attempting to start the “transfer” ball rolling.
Firstly, what sort of UK Pension is it?
A lot of people are making enquiries about the UK State Pension. This is a little like our Centrelink Age Pension, and can’t be transferred (we can help with this, but it’s a totally different beast).
If it’s not a State Pension, is it a DB (defined Benefit), or a PP (private pension)?
This differentiation is extremely important.
A defined benefit pension is one which promises to pay a specific annual income from a specific retirement age, for as long as you live.
A private pension is a bit more like our super funds here in Australia, and has an ever-changing fund balance depending on market performance, contributions and charges etc.
There is a lot more to trying to transfer a DB Pension than a PP. We find that most of our enquiries are about DB Pensions.
For a start, the UK Government insists on people getting independent (FCA approved) advice, before allowing any transfer. This means that, along with everything else, you must answer questions, and pay for a UK-based adviser to effectively tell you that, in his or her opinion, you probably shouldn’t transfer your UK Pension to Australia.
Why do they do this? Because, like us, they really aren’t allowed to advise on tax & estate laws in another country.
You will also find that virtually no FCA-approved adviser will be willing to give you this advice unless they are sure you are receiving expert advice on the Australian end. Their PI insurers insist on this.
DB schemes will need to do actuarial calculations to work out how much of a lump sum you are due (to be able to transfer), to replicate the promise of your (lifetime) pension. This is called a CETV (cash equivalent transfer value). These change all the time, depending on the UK Gilt (government bond) rates.
If you’ve got this far, believe me, we’re just beginning!
Transfers from DB Pensions are all, or nothing. You can’t do partial transfers.
Why is this important? It has to do with the Australian super contribution caps. As alluded to in other articles, things just got a whole lot harder when these were reduced on 1st July this year.
If the CETV of your UK defined benefit pension is going to push you over these caps, you will need to have “other arrangements” put in place.
You may need to have a SIPP (self-invested personal pension) set up for you in the UK, to allow a full rollout from your DB scheme, and use this as a holding tank to allow your transfer to an Australian QROPS super fund to be done in tranches, to comply with Australian super contribution caps.
This brings us to our next point.
You can only transfer your UK Pension to a QROPS Australian super fund.
Since April 2015, when HMRC (Her Majesty’s Revenue & Customs) took all bar one Australian funds off its QROPS list, there has only been one public offer fund join this list (to date).
There are around 550 funds on this (Australian) list, with most being SMSF’s, all of which apply for individual QROPS registration.
To get this registration, the fund must only be open to members aged 55 and over.
So, unless you want to use the one public offer fund (which we have decided against for several important reasons), you must set up a new SMSF, then register, and apply for QROPS registration.
We also recommend being able to transfer your UK funds into your QROPS SMSF in Pounds Sterling (GBP). This allows you to choose when to convert your currency.
OK, are you still with me?
Back to those questions about your UK Pension. One of the early and most important ones is:
Has it commenced paying a pension?
If it has, it can’t be transferred, full stop.
Most DB schemes have a commencement age of 60 or 65, but if they haven’t commenced, there’s still a good chance that they may be able to be transferred.
Next question: how long have you been in Australia (with the intention to stay)? And, how long were you a member of the UK scheme?
This is how the taxable portion is worked out. The “growth” part (since you came to Oz) is not counted as a non-concessional super contribution (therefore the amount allowed is unlimited), but can be taxed in the fund at 15%. The original amount is counted as an NCC (Non Concessional Contribution), but not taxed.
So, the process for a DB UK Pension may look like this:
- Do all initial set-up (including FCA report, Australian UK Pension transfer report, set up SMSF, set up SIPP, register SMSF with ATO & QROPS, fill in UK pension applications and CETV request etc).
- Roll funds from DB scheme provider to UK SIPP.
- Transfer in tranches (if applicable) to QROPS registered SMSF, being sure to comply with any HMRC reporting.
- Get advice on when & how you can access funds in retirement.
- This will have to do with the newly changed 10 year UK non-residency rule!
As you can see, there’s a bit to it. If your fund is a Personal Pension, it’s a little less complicated.
But, this is by no means an exhaustive list. This is only to outline how involved the process is. We haven’t touched on lifetime allowances, the difference between outcomes on death of the pensioner, tax election notices … and many more.
Finally, please don’t even consider trying to act on anything discussed in this article.
Get the peace of mind of seeking written advice from a specialist in this field, and let them use their expertise to get the very best outcome for you. The potential consequences of a wrong move are too dire to take the risk!
John Goldie CFP
UK Pension Transfer Specialist