Policy paper

Foreign pension schemes

Published 5 December 2016

Who is likely to be affected

The following will be affected:

• individuals with pension savings in a pension scheme based outside the UK or specialist pension schemes for those employed abroad (‘section 615’ scheme)
• scheme administrators of registered pension schemes (RPS)
• scheme managers of pension schemes outside the UK with funds that have had UK tax relief (relevant non-UK schemes)
• scheme managers who accept pension contributions or transfers with UK tax relief into their pension scheme based outside the UK
• advisers who have clients who are members of an RPS or a foreign pension scheme

General description of the measure

This measure provides for closer alignment of the UK tax treatment of payments out of ‘foreign pension schemes’ with the UK’s domestic tax regime and pension schemes used for those employed abroad. It extends the period over which UK tax charges arise on payments out of funds that have had UK tax relief in relevant non-UK schemes (RNUKS), closes section 615 schemes to new savings, aligns the tax treatment of funds transferred between RPS as well as bringing payments of foreign pensions and lump sums fully into tax for UK residents. It also updates the conditions that a pension scheme has to meet to be a qualifying overseas pension scheme (QOPS) or a qualifying recognised overseas pension scheme (QROPS).

This measure is intended to limit the inconsistencies in the remaining tax treatment of UK and foreign pension savings. In particular, we intend to address the gaps that arise as a result of only certain parts of the UK tax regime applying to foreign pension schemes.

Policy objective

This measure supports the government’s objective of promoting fairness in the tax system by limiting the inconsistencies in the tax treatment of UK and foreign pension savings. These changes will also help make the tax system simpler.

Background to the measure

In the UK the foreign pension tax regime has remained broadly the same since the wholesale changes to the pension tax regime in 2006. In 2012 and 2015 Parliament made some changes to the requirements that foreign schemes had to meet for UK tax relief to apply to them, particularly in relation to transfers they receive but the tax treatment of foreign pensions or pension provision in relation to foreign service has remained largely the same. This has led to the marketing of some of these foreign pension tax provisions as ways of avoiding UK tax.

Following the announcement at Budget 2014 introducing pension flexibility, draft regulations making further changes were published for consultation on 19 December 2014. These draft regulations contained some provisions that, in the end, were not introduced to Parliament and the ‘70% rule’ (which requires 70% of funds that have received UK tax relief, either in connection with contributions or as a result of a tax-free transfer, to be designated to provide the individual with an income for life) has remained in place temporarily.

Detailed proposal

Operative date

The measure will have effect on and after 6 April 2017.

Current law

Foreign pensions

The tax rules applying to income from a foreign pension scheme are set out in Chapter 4, Part 9 of Income Tax (Earnings and Pensions) Act (ITEPA) 2003. These set out that where a pension is paid to a person who is resident in the UK, by or on behalf a person who is outside the UK, that 90% of the income arising in the tax year is liable to tax on the recipient. A similar provision also applies to foreign annuities.

These rules do not apply where the pension is otherwise taxable under Chapters 5 to 14 of ITEPA 2003.

Foreign pension lump sums

Lump sums paid from foreign pensions are taxable in the UK where they fall into one of the following categories:

• the foreign pension scheme is a registered pension scheme under Part 4 Finance Act (FA) 2004
• the scheme contains funds that have had UK tax relief and is an RNUKS under Schedule 34 FA 2004 and UK tax rules apply
• the scheme is provided in relation to an employment and payments under the scheme are relevant benefits within Chapter 2, Part 6 of ITEPA 2003 (an employer-financed retirement benefits scheme, EFRBS)
• the payment is a ‘relevant step’ under the provisions of Part 7A of ITEPA 2003
• in some circumstances where the scheme is constituted under section 615 of the Income and Corporation Taxes Act (ICTA) 1988

In any other circumstance the lump sum is not taxable.

Relevant non-UK schemes

Payments out of pension schemes based outside the UK that have had UK tax relief may be subject to UK tax charges under Schedule 34 to FA 2004 if paid to a UK resident or someone who has been resident in the UK in the previous five tax years.

In order to get UK tax relief foreign schemes must meet certain requirements. In certain cases the scheme rules of QROPS and QOPS must require a minimum of 70% of the funds that have had UK tax relief to be used to provide the individual member with an income for life.

Section 615 schemes

Any lump sum paid to UK residents out of a scheme set up under section 615 of ICTA 1988 is reduced for tax purposes by section 414A of ITEPA 2003 in respect of any service carried out overseas, which effectively means that the benefit can be paid out tax free to UK residents.

Foreign registered pension schemes

Pension schemes based outside the UK are able to register for tax purposes in the UK. If they do then they can get UK tax relief under the pensions tax rules in Part 4 of FA 2004. However, the tax treatment is not identical to that of registered pension schemes established in the UK.

Proposed revisions

Legislation will be introduced in Finance Bill 2017 so that:

• where a foreign pension or lump sum is paid to a UK resident, 100% of the pension arising will be chargeable to UK tax (to the same extent as if they had been paid from a registered pension scheme)
• no new pension schemes can be established under section 615 of ICTA 1988, and no further contributions can be made to existing schemes. Funds accrued in a section 615 scheme before 6 April 2017 will continue to be paid out using the existing rules
• the tax treatment of funds in RPSs based outside the UK will be more closely aligned with that of UK-based RPSs
• UK tax charges can apply to a payment by an RNUKS to an individual who has been resident outside the UK for less than 10 tax years
• the 70% rule will be removed from the conditions that a pension scheme has to meet to be an ‘overseas pension scheme’ or a ‘recognised overseas pension scheme’ and the pension age test is revised so that additional payments may be made and the test still be met. As a result if a non-occupational pension scheme is not regulated and the provider of that scheme is not regulated, it will not be able to be a QOPS or QROPS

Summary of impacts

Exchequer impact (£m)

2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022
-	+10	+25	+15	+60	+70

These figures are set out in table 2.1 of Autumn Statement 2016 as ‘Offshore Tax: close loopholes and improve reporting’. These figures represent the combined Exchequer impact of ‘Offshore funds: Calculation of reportable income’, ‘Foreign pension schemes’ and ‘Tackling offshore tax evasion: A requirement to correct’, and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2016.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

Individuals and households with foreign pension savings will be affected as these changes to align the tax treatment with UK pension payments may influence their decisions on moving or managing their pension savings outside of the UK. It is anticipated that the number of individuals affected will be in the tens of thousands, although precise estimates are not available.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

These changes are expected to have minimal impacts on the legally protected equality groups. They are more likely to affect older people, bringing the tax treatment of payments to a sub-category of that group into line with the treatment of pension payments to other UK residents.

Impact on business including civil society organisations

This measure is expected to have a negligible impact on businesses and civil society organisations.

Occupational pension scheme managers will not be required to provide any additional information to HM Revenue and Customs (HMRC) as a result of this measure but scheme managers of non-occupational pension schemes that are not regulated may themselves have to be regulated so that their scheme can still meet the requirements. This is expected to place an additional burden on only a small number of schemes.

RNUKS providers may face greater administrative costs as they adjust to new reporting requirements as well as the prospect of complying with member payment charges regulations for a longer period. However, these costs are expected to be negligible overall.

Operational impact (£m) (HMRC or other)

It is not anticipated that implementing this change will incur any significant additional costs or savings for HMRC.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be kept under review through communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact Beverley Davies on Telephone: 03000 512336 or email: pensions.policy@hmrc.gsi.gov.uk.