As you will no doubt be aware, financial planning and taxation issues for Brits working abroad aren’t always straightforward.
What often doesn’t help is the way HMRC use jargon to describe certain processes and situations. This can be impenetrable to all except technical and financial planning experts.
In our last newsletter, we looked at the ”non-residence enhancement factor” and how using this could help reduce your tax bill when you retire. This discussed the scenario when a non-UK resident builds up entitlement within a UK-registered pension scheme and the potential to enhance the Lifetime Allowance.
This month, we look at another potential enhancement given by HMRC – the “recognised overseas transfer factor” which considers the potential enhancement to the lifetime allowance when transferring an overseas pension into a UK registered pension.
Subject to your circumstances, this could be a very valuable benefit that could save you a lot of money, and help you avoid a potential tax charge of up to 55%.
Understanding how the recognised overseas transfer factor works
The recognised overseas transfer factor is an enhancement given by HMRC when someone transfers funds from a recognised overseas pension scheme (ROPS) into a UK-based scheme.
Every individual has a Lifetime Allowance (LTA). This is the overall limit of UK-based tax-privileged pension funds someone can accrue during their lifetime. If they exceed it, a LTA tax charge applies. The current allowance is £1,073,100 for tax year 2021/22.
What the recognised overseas transfer factor does is potentially increase your allowance, and therefore increase the pension you can accrue without incurring a tax charge.
It does this by taking into account the tax relief you were not entitled to when you were paying into the ROPS because you were not subject to UK tax at the time.
You calculate the recognised overseas scheme transfer factor by dividing the amount transferred by the LTA as at the date of the transfer.
But be aware that if contributions into the overseas arrangement after 5 April 2006 received UK tax relief the amount transferred is reduced by the relevant relievable amount.
A worked example
Here is an example to give you an idea of how it works (for illustration purposes only).
- Jude transferred £220,000 from an arrangement under a ROPS to a UK-registered pension scheme on 6 June 2017.
- There is no relevant relievable amount.
- The standard LTA for the 2017/18 tax year was £1 million so the recognised overseas scheme transfer factor is calculated by dividing £220,000 by £1 million.
- This means that the resulting transfer factor is 0.22.
Therefore, based on the 2021/22 tax year – and an LTA of £1,073,100 – Jude would be entitled to an enhanced Lifetime Allowance of £1,309,182.
So, Jude’s LTA has increased by £236,082. Jude can therefore take that amount as pension without incurring an additional tax charge.
If you exceed the Lifetime Allowance the excess charge is:
- 55% if taken as a lump sum
- 25% if taken as income.
That’s on top of standard tax payable. So, you can see that the recognised overseas transfer factor can be a valuable facility. In our example, Jude can take a further £236,082 as pension – either lump sums or regular income – without incurring an excess charge. Income Tax will still be payable at marginal rates.
(Note that this assumes Jude had not applied for any other Lifetime Allowance protection or enhancement and had not yet used up any LTA via a benefit crystallisation event.)
There’s a short-term window of opportunity
There is a window of opportunity here that will close on 31 January 2022.
You only have until next January (2022) to claim for an enhanced LTA and therefore potentially avoid the LTA tax charge, subject to your individual circumstances, if during the 2015/2016 tax year you either:
- ceased to be a ‘relevant overseas individual’ – meaning you ceased to be an active member of a UK registered pension scheme as an overseas resident or you became UK tax resident, or
- you transferred funds from a ROPS into a UK-registered pension scheme,
This could save you money, as enhancing your LTA means an increase in the amount you can withdraw tax-efficiently from your pension without incurring a tax charge.
The deadline for applications
Applications for the recognised overseas transfer factor must normally be made no later than 31 January following the end of the tax year five years after the end of the tax year in which the recognised overseas scheme transfer took place.
So, in Jude’s example, the transfer took place in the 2017/18 tax year. Five years after the end of that tax year is 5 April 2023, so the following 31 January will be 31 January 2024.
However, HMRC may accept a late notification in limited circumstances.
As we’ve already covered, this could be a very valuable benefit for anyone who meets the necessary criteria.
You can only apply if you meet the eligibility criteria for the enhancement. To understand if you’re eligible, and before applying, we would strongly recommend that you speak to a qualified financial adviser as soon as possible before your relevant deadline.
How we can help you
We appreciate this kind of pension planning can be confusing.
We are ideally placed to help you, with offices in both the UK and Hong Kong, and individuals who understand both tax regimes and how they can impact on your planning process.
Finally, just a quick reminder about the short-term window of opportunity we flagged up. If you think you might be impacted, please get in touch.
Get in touch
Please contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.