Policy paper

Qualifying recognised overseas pension schemes: charge on transfers

Published

Who is likely to be affected

  • individuals who request an overseas pension transfer on or after 9 March 2017
  • scheme administrators of registered pension schemes
  • scheme managers of qualifying recognised overseas pension schemes (QROPS)
  • advisers who have clients who want to make an overseas pension transfer

General description of the measure

This measure ensures that transfers to QROPS requested on or after 9 March 2017 will be taxable unless, from the point of transfer, both the individual and the pension savings are in the same country, both are within the European Economic Area (EEA) or the QROPS is provided by the individual’s employer.

If this is not the case, there will be a 25% tax charge on the transfer and the tax charge will be deducted before the transfer by the scheme administrator or scheme manager of the pension scheme making the transfer.

It also widens the scope of UK taxing provisions so that, following a transfer to a QROPS on or after 6 April 2017, they apply to payments out of those transferred funds in the five tax years following the transfer.

Policy objective

This measure supports the government’s objective of promoting fairness in the tax system. It continues to allow overseas transfers from pension schemes that have had UK tax relief that are made when people leave the UK and take their pension savings with them to their new country of residence.

Background to the measure

The tax treatment of overseas transfers from registered pension schemes has remained broadly the same since the changes to the pensions tax regime in 2006. The regime was strengthened between 2012 and 2015 to more precisely define the types of pension schemes that could receive tax-free transfers and improve the information required in relation to these transfers.

Detailed proposal

Operative date

The overseas transfer charge will have effect for transfers requested on or after 9 March 2017 and the extended taxing provisions on payments out of QROPS will have effect on and after 6 April 2017.

Current law

Current law is contained in Part 4 Finance Act (FA) 2004 and Regulations.

Transfers that comply with section 169(1) FA 2004 are recognised transfers and can be made free of UK tax, up to the lifetime allowance, to QROPS.

Schedule 34 FA 2004 contains the UK tax rules that apply to pension schemes outside the UK that have had UK tax relief, including QROPS.

Regulation 3 of the Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and recognised Overseas Pension Schemes) Regulations 2006 (Statutory Instrument S.I. 2006/206) sets out the requirements that a pension scheme has to meet to be a ‘recognised overseas pension scheme’ (ROPS).

Proposed revisions

Legislation will be introduced in Finance Bill 2017 so that:

  • Transfers to QROPS requested on or after 9 March 2017 will be taxed at a rate of 25% unless at least one of the following apply:
    • both the individual and the QROPS are in the same country after the transfer
    • the QROPS is in one country in the EEA (an EU Member State, Norway, Iceland or Liechtenstein) and the individual is resident in another EEA after the transfer
    • the QROPS is an occupational pension scheme sponsored by the individual’s employer
    • the QROPS is an overseas public service pension scheme as defined at regulation 3(1B) of S.I. 2006/206 and the individual is employed by one of the employer’s participating in the scheme
    • the QROPS is a pension scheme established by an international organisation as defined at regulation 2(4) of S.I. 2006/206 to provide benefits in respect of past service and the individual is employed by that international organisation
  • UK tax charges will apply to a tax-free transfer if, within five tax years, an individual becomes resident in another country so that the exemptions would not have applied to the transfer
  • UK tax will be refunded if the individual made a taxable transfer and within five tax years one of the exemptions applies to the transfer
  • The scheme administrator of the registered pension scheme or the scheme manager of the QROPS making the transfer is jointly and severally liable to the tax charge and where there is a tax charge, they are required to deduct the tax charge and pay it to HM Revenue and Customs (HMRC). This applies to scheme managers of former QROPS that make transfers out of funds that have had UK tax relief, if the scheme is a QROPS on or after 14 April 2017 and at the time the transfer to the former QROPS is received
  • Payments out of funds transferred to a QROPS on or after 6 April 2017 will be subject to UK tax rules for five tax years after the date of transfer, regardless of where the individual is resident

HMRC will provide guidance setting out how the new tax charge will work and the new obligations.

Summary of impacts

Exchequer impact (£m)

2017 to 2018 2018 to 2019 2019 to 2020 2020 to 2021 2021 to 2022
+65 +60 +60 +65 +65

These figures are set out in Table 2.1 of Spring Budget 2017 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Spring Budget 2017.

Economic impact

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

The costing accounts for the behavioural responses of both individuals and pension providers to the changes.

Impact on individuals, households and families

Individuals and households with UK pension savings who intend to transfer those pension savings outside the EEA to a pension scheme in a country other than their country of residence will be affected by these changes.

There are generally between 10,000 and 20,000 transfers to QROPS each year. It is expected that only a minority of these transfers will be subject to this policy.

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

Equalities impacts

These changes are expected to have minimal impact on the legally protected equality groups. They are more likely to affect those between the ages of 40 and 60 as they make the most pension transfers and more likely to affect men than women as more men have pension savings.

Impact on business including civil society organisations

This measure is expected to have a negligible impact on businesses. Around 1,600 QROPS scheme managers are required to make a decision about whether to continue to accept recognised transfers from UK schemes. Those that decide to retain their scheme’s QROPS status will incur a negligible one-off cost as they familiarise themselves with the rules to apply the new tax charge to transfers. There is no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

In order to implement this change for April 2017, HMRC will need to change IT systems at an estimated cost of £0.9 million.

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 the 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.