How to Transfer your UK Pension to Australia
If you are looking to transfer a UK Pension fund to Australia in 2020 you may well discover it is a complicated process. Complicated, but in many circumstances worth it.
It is understandable that if you are a UK expat (or returning Australian), who has decided to make Australia their permanent home, you will want to transfer your UK pension to an Australian superannuation fund ready for when you retire here. Doing this will provide you with certainties around personal taxation, currency control and death benefits. Plus, there is the added benefit of ease of managing your retirement and pension account in one jurisdiction.
There are a number of questions you will need to answer first though, to make sure transferring your UK Pension fund to Australia will place you in a better financial position.
The first question is: Am I old enough?
Are you aged 55 or over? This is the minimum age you will be eligible to transfer your UK Pension to Australia. This is because on the 6th April 2015, HMRC disqualified all Australian QROPS funds because they permitted access prior to age 55 if a member met the financial hardship conditions. This access rule is not available under UK pension rules so meant Australian QROPS funds placed members in a better position than their UK counterparts. This is not acceptable to the HMRC.
This resulted in all but one Australian superannuation fund being removed from the Qualifying Recognised Overseas Pension Scheme (QROPS) list managed by HMRC.
If you are under age 55 you should still receive advice on your options. We deliver that advice.
Since the 2015 rule change many new QROPS funds in Australia are set up as Self Managed Super Funds (SMSF). These funds can be written under specific trust deeds that only permit membership for those aged 55 or over and therefore comply with HMRC requirements. There was an expectation that many retail super would adopt the rule change but this has not materialised, for a variety of reasons.
Currently, in Australia there is only one retail QROPS super fund, but there are others being planned.
What is a QROPS/ROPS? (briefly)
If you wish to avoid an HMRC tax penalty of up to 55% of your fund value, you must transfer your UK Pension fund to an Australian QROPS complying super fund. Essentially this is an agreement the scheme manager makes with the HMRC to report for ten years to ensure the new scheme meets HMRC requirements (outside of the scope of this article)
The way I explain it to clients, is your UK Pension is sitting on the runway at Heathrow airport (feel free to interchange Manchester, Glasgow, et al) and wishes to fly to Sydney (feel free to interchange to Adelaide, Brisbane, Melbourne, Perth). The only airline flying this route is QROPS. There is no buffet service, inflight movie or comfy leg room but it gets you there safely. Plus, you need to check in for ten years!
The second question is: Should I transfer my UK to an Australian QROPS?
You need to ascertain whether you will actually be better off in transferring your fund to Australia. Once you have reached the minimum age requirement it’s a good time to check the advantages and disadvantages of a transfer before doing so. (Did I mention the QROPS airline only flies one way, and you can’t get on a return flight?)
Broadly speaking your UK pension fund will fall into one of the below categories:
- Defined benefit (final salary)
- Defined Contribution (Money purchase)
- Hybrid (Combination of the two)
Defined Benefit or Final Salary
There has been much written recently around defined benefit schemes. Some articles are true, some contain gross exaggerations. Defined benefit schemes are employer sponsored pension funds which promise you a guaranteed pension amount in retirement. The amount of pension you will receive is based on a formula linked to your length of service and your final salary when you left that employer.
If you wish to investigate whether to leave that fund then you will need a Cash Equivalent Transfer Value from the scheme and that CETV should be analysed against any new plan.
This is a huge topic and requires qualified, specialist advice from an Australian regulated adviser with UK qualifications.
CETVs are currently at a high level compared against the promised pension levels, for a variety of UK economic reasons. If the CETV is greater than £30,000 it is a UK legislative requirement to seek advice from a UK based Pension Transfer Specialist. If the advice from the UK adviser is to not transfer then you really shouldn’t. Be very careful when taking any advice around your Defined benefit. If in doubt contact us.
Defined Contribution or Money Purchase Pension
A defined contribution UK pension is more akin to an Australian super fund. The amount you receive at retirement will ultimately be based upon how much was put in (contributions), how much was taken out (charges) and how much it grows by (investment performance).
Unlike Australian superannuation though, there are over 240 different styles of UK defined contribution pension. Each time the UK pension rules changed or contract styles from pension providers were updated, they frequently only applied to future contracts not historical contracts. Therefore, we see many defined contribution funds have contract terms that must not be given up without qualified analysis.
The tax advantages of transferring to an Australian QROPS fund may not offset the loss of contract guarantees and you will place yourself in a worse off position.
Contract types for defined contributions include:
- Personal Pension Plan
- Retirement Annuity Contracts
- Executive Pension Plan
- Group Personal Pension
- Master trust pension
- SIPP (Self Invested Personal Pension)
- SSAS (Small Self-Administered Schemes)
- Stakeholder pensions
These pension schemes all have different rules which may mean that you should at least postpone a transfer, or in some cases, NOT transfer your UK pension to Australia at all.
Conversely, those that do not provide a level of guarantees may actually provide extremely poor death benefits (sometimes a return of contributions only) with high fees (previous commissions being paid to an adviser).
The third question is: Will Australia allow me to transfer my UK pension?
Once you have taken advice and decided it is in your best financial interest to transfer your UK Pension to Australia, you need to check that you are eligible to. Foreign super transfers (such as a UK Pension fund) are not treated by the Australian Taxation Office (ATO) as a transfer or rollover of existing benefits, but as a new contribution. Therefore, you need to ensure your UK Pension fund complies with the Australian contribution rules for non-concessional contributions.
- You need to be below age 65 to contribute, or satisfy the “Work Test”
- You are entitled to contribute $100,000 per tax year as a non-concessional contribution (where no tax relief is applied)
- If you are under age 65 you can contribute for this tax year and the next two tax years in one transaction. Therefore, you can contribute up to $300,000 in a single year, and then cannot contribute again for the next two years.
The fourth question is: Is there any tax to pay on transfer?
Potentially. The UK government will not apply tax on a transfer out to a QROPS SMSF, the Australian Taxation Office (ATO) may.
If you transfer your fund within 6 months of arriving in Australia then there is no tax due. The problem there is, it is usually too early to be confident that Australia is your new home for life (remember the one-way airline?)
After this period, you will be subject to Applicable Fund Earnings tax, which is an ATO levied tax and is meant to bring you into line as if you transferred your fund the day you arrived. Effectively it is calculated as a taxation of the difference in your fund value from the date you arrived in Australia to the date you transferred your funds. It is not a tax on the entire balance as some would have you believe.
Once the tax due is calculated it can either be added to your income and taxed at your marginal rate or it can be deducted by the fund itself at a rate of 15%, which is commonly the preferred route. That would be the case if your average marginal rate of tax is greater than 15%.
The good news here is that Applicable Fund Earnings is not classed as a contribution. If your UK Pension fund was valued at less than $300,000 (in today’s terms) when you became an Australian tax resident then you may be entitled to transfer the entire balance in one transaction. The difference between that value and today’s value (the growth element) is the taxable amount and should be eligible to transfer across regardless of how much it is.
The fifth question is: Do I have to convert my UK pension to Australian dollars?
No. There is no legislative requirement to convert your UK Pension to Australian dollars when transferred to an Australian QROPS SMSF. In fact, many people have been delaying the transfer purely because of the conversion rate for absolutely no reason. We have the facility to set up a qualifying QROPS SMSF in Australia with the underlying investment portfolio invested in GBP funds. We create properly invested portfolios invested in GBP or AUD, or any combination of the two. This is not to be confused with GBP bank accounts which provide nil return. That’s no good.
The above is just a brief overview of some issues to address when considering transferring your UK Pension fund to Australia. It is intended as a general guide only, and in no way constitutes advice. Please feel free to get in touch if you wish to discuss your own circumstances, which differs from individual to individual.
Simon Harding is an Australian regulated financial adviser. He holds Certified Financial Planner status in both the UK and in Australia. He is also the only CFP Chartered Fellow of the UK’s Chartered Institute of Securities and Investment currently licensed to provide advice in Australia.