U.K. Pensions 25 percent CLS taxable or not?

[juliew1499]

Hi

We have read so many things about pensions we are now starting to get confused. If Immi pull their socks up we should be in Oz by July 2016, hopefully we will QROP some of our pensions but there is one sizeable one that will have to be paid from UK. If we draw this pension before we go then we can have 25 percent tax free, if we wait until we are in Oz to draw it does Oz tax the cash lump sum?

Julie

[Ken]

The short answer is that only income is taxed. The value of your pension pot when you emigrate already exists and so it's not income it's capital. When you make a withdrawal part will be of your capital and part will be attributed to the growth (in proportion to the amount of original capital and the amount of growth in your total pension pot). The part of the lump sum (or other pension drawing) attributed to the growth will be taxed as part of your income for that tax year. It's different if you're a temporary resident.

[Andrew from Vista Financial]

Hi Julie

 

As Ken points out assuming you will be permanent residents the income will be assessed in Australia for tax but the lump sum is treated quite differently (generally the growth of the fund only known as applicable fund earnings (AFE)) although what you do with the rest of the pot at the time of taking this will have an impact.

 

Yes the Australian QROPS landscape has changed massively recently and although the Australian schemes on the ROPS list are growing strongly these are typically Self-Managed Super Funds for members over age 55.

 

You mention a sizeable pension being paid from the UK, since one of the major attractions of Australian Super is the generally tax free income over age 60 and given the associated costs with running a SMSF it may be worth considering an Australian QROPS for the bigger and smaller pots rather than just the smaller ones.

 

Regards

 

Andy

[juliew1499]

Hi Ken and Andrew

Thank you for your replies, unfortunately we are now even more confused!!!

Just to clarify, we will be permanent residents on arrival in Oz.

We have 2 uk pensions that we have been advised not to transfer, both pensions will be paid like an annuity, eg monthly until we die.

we have the option to start the payments at age 64 whilst we are still in the UK (we can have a cash lump sum of 25 percent up front free of tax) or

we can wait until age 65 we will be in Oz by then. We will still get 25 percent tax free in Uk but will Oz want to tax that amount?

Our understanding is that our Uk pensions will be taxed at source in the Uk less personal allowance.

The U.K.pensions have to be declared as foreign income on our Oz tax returns but the double taxation agreement means that we would not be liable for any further tax.

Your comments regarding income and capital have confused us.

Julie

[Alan Collett]

Hi Julie.

 

Under the provisions of the Tax Treaty between the UK and Australia pension income paid from the UK to a tax resident of Australia (who isn't a temporary visa holder) is wholly taxable in Australia.

 

Here's what the Tax Treaty says:

 

ARTICLE 17 Pensions and annuities

1 Pensions (including government pensions) and annuities paid to a resident of a Contracting State shall be taxable only in that State.

 

I have emboldened the word "only".

 

In practice once you are in Australia and have a Tax File Number each person who is in receipt of a pension completes the relevant HMRC form and sends it to the ATO.

 

The ATO stamps the form, and sends it to HMRC.

 

What should then happen is that a NT (= No Tax) PAYE Coding is applied to your UK pension income.

 

You then declare the UK pension income on your Australian tax return each year, and pay tax to the ATO - initially following the issuing of a Tax Assessment Notice after the lodgment of your first Australian tax return, and then (most probably) quarterly on account under the Activity Statement regime.

 

 

It can be a tad difficult to follow the practicalities initially, so you may want to consider instructing a tax agent to help you for the first year or two while you get to grips with how it works.

 

Hope this helps!

[juliew1499]

Hi Alan

 

Thank you so much for your reply, it pretty much confirms our understanding of the situation. Do you know what the HMRC fm number is that we have to complete?

 

so, still trying the get to grips with the cash lump sum query. Is it better to draw our pension at age 64 in the Uk and get 25 percent tax free. If we draw our pensions at age 65 when we are Oz resident will the ATO want to tax all of it and we therefore loose the benefit of 25 percent tax free?

 

Julie

[Alan Collett]

Hi Alan

 

Thank you so much for your reply, it pretty much confirms our understanding of the situation. Do you know what the HMRC fm number is that we have to complete?

 

so, still trying the get to grips with the cash lump sum query. Is it better to draw our pension at age 64 in the Uk and get 25 percent tax free. If we draw our pensions at age 65 when we are Oz resident will the ATO want to tax all of it and we therefore loose the benefit of 25 percent tax free?

 

Julie

 

 

Hi again Julie.

 

If you draw a lump sum soon after you have become tax resident in Australia I doubt that much (if any) of the lump sum will be taxable - in broad terms I anticipate that you'd need to compare the value of the available lump sum on the date you become a tax resident of Australia with the actual sum received. The difference between the two would be the amount that is taxable in Australia.

 

As Andy at Vista says, you might also consider setting up a SMSF in Australia and (assuming it is properly established to be QROPS compliant) transferring your UK pension benefits into the SMSF. This would have to be done before you start drawing down on the pension. You may find yourself in a much improved after tax position if you do this.

 

Whether this is a worthwhile exercise will be substantially contingent on the value of your UK pension fund/s.

 

Feel able to send a PM or email to me (click on my name to the left of this post) if you'd like to explore this in more detail.

 

Best regards.

[Alan Collett]

https://www.gov.uk/government/publications/double-taxation-united-kingdomaustralia-si-2003-number-3199-form-australia-individual-2003

 

PS. Here is the form referenced in my earlier post.

 

Again, please feel able to contact me if you think you'll need any assistance with this and tax matters going forwards.

[Gbye grey sky]

We have 2 uk pensions that we have been advised not to transfer, both pensions will be paid like an annuity, eg monthly until we die.

we have the option to start the payments at age 64 whilst we are still in the UK (we can have a cash lump sum of 25 percent up front free of tax) or

we can wait until age 65 we will be in Oz by then. We will still get 25 percent tax free in Uk but will Oz want to tax that amount?

Julie

 

Hi Julie

 

Just curious about this comment and who has advised you? Are these index-linked pensions or are they pensions which when they mature permit you to draw 25% tax free before purchasing an annuity.

 

The advice you have been given on this may, or may not, be suitable. Was it advice from an IFA or someone who is arranging the purchase of the annuity. If you are planning to retire in Oz and the amount is worthwhile you might wish to speak with Andrew about an SMSF as that may carry long term tax benefits for you rather than leaving the pension in the UK.

 

David

[Andrew from Vista Financial]

Hi Alan

 

Thank you so much for your reply, it pretty much confirms our understanding of the situation. Do you know what the HMRC fm number is that we have to complete?

 

so, still trying the get to grips with the cash lump sum query. Is it better to draw our pension at age 64 in the Uk and get 25 percent tax free. If we draw our pensions at age 65 when we are Oz resident will the ATO want to tax all of it and we therefore loose the benefit of 25 percent tax free?

 

Julie

 

Hi Julie

 

They certainly will not want to tax all of it although there may be some tax depending on a few factors. I have some ATO private rulings on this topic that we have assisted clients in obtaining, I can send these to you to get an understanding of how the ATO consider it.

 

I believe we may have had previous email exchanges? I can email them over (easier to attach etc as well) if it is you.

 

Regards

 

Andy

[juliew1499]

Hello Andrew

Yes we have had previous correspondence.

We have always been keen to transfer some of our fund to a QROPS to help with our tax situation. We know that at the moment there are only SMFS's available. Having looked up info on the ATO site regarding SMSF's we were put off by the amount of paperwork and investment knowledge required. Neither of us has any I interest in managing a fund or being up to date with all the Super regulations. If there is any easier way of managing an SMSF then please let us know. Is there any hope that any compliant QROPS schemes are coming back to the market in the next couple of months?

 

Julie

[Alan Collett]

Hi Julie.

 

The knowledge required to be compliant in a SMSF context ought not be too overwhelming - professional support is available to help you.

 

Have a look at this website too: http://www.superguide.com.au/superannuation-topics/running-a-smsf?utm_source=menu&utm_medium=smsfs&utm_campaign=running_a_smsf

 

 

Best regards.

[Andrew from Vista Financial]

Hello Andrew

Yes we have had previous correspondence.

We have always been keen to transfer some of our fund to a QROPS to help with our tax situation. We know that at the moment there are only SMFS's available. Having looked up info on the ATO site regarding SMSF's we were put off by the amount of paperwork and investment knowledge required. Neither of us has any I interest in managing a fund or being up to date with all the Super regulations. If there is any easier way of managing an SMSF then please let us know. Is there any hope that any compliant QROPS schemes are coming back to the market in the next couple of months?

 

Julie

 

Hi Julie

 

I will email over the details regards ATO treatment of PCLS, given that if the 25% lump sum was taken (from the pension you are not looking to transfer) prior to emigrating it is certain there will be no tax this may be the most efficient option?

 

Re QROPS retail schemes, there is nothing in the pipeline as far as I am aware, at this stage their priority around QROPS is trying to collate details of members whose payments were received post 6 April 15 into essentially non QROPS funds and seek relief from HMRC tax charges for unauthorised payments.

 

Whether some will look at an over 55s solution remains to be seen, it is a limited market place now for this type of business and so commercially it may not be viable for them.

 

I understand what you are saying regards a SMSF and this is something that I have given a lot of thought into recently, SMSFs are not for everyone but there are number of reasons that a person might consider a SMSF which range from:

 

 

• Investing in direct shares (although this is possible with some public offer Super Funds);

• Investing in direct property (residential and business/commercial);

• Wanting to control the running of their own Super and be the ultimate decision maker;

 

Prior to this HMRC change re QROPS a SMSF was not necessary for UK Pension Transfers, now for a person to transfer directly it is and therefore in my mind this now adds another reason to the list of why SMSFs should be considered.

 

However and like you point out they are not for everybody as there are additional responsibilities, so you would need to have an understanding of the superannuation system because ultimately you will be the trustees of the fund.

 

There are those who open a SMSF and virtually run/administer and operate everything themselves including making the investment decisions as they are able to and have the knowledge and experience required.

 

There are those who might take an active part in some areas but not others, for example they may feel comfortable administering ie keeping records of all transactions that occur from contributions to withdrawals to income distributions from investments however they may outsource the investment decisions/asset allocation selection to a professional (Financial Planner, Stock broker).

 

Finally there are those who outsource virtually everything and with technology nowadays this is most definitely possible and is becoming cheaper, so for example the administration is outsourced to an administration company, the tax returns to an Accountant (quite a lot of the time the administration company has an agreement in place with one and is able to substantially reduce costs) and the investment recommendations and fund strategies are outsourced to a Financial Planner.

 

So it can be possible to take a lesser role in running the fund to a certain extent.

 

 

Anyway I will keep the forum updated on any further movements in this space as always.

 

Kind regards

 

Andy