Taking the 25% lump sum from UK private pension

[InnerVoice]

I intend to retire at the end of the current Australian tax year.

I have a UK private pension which I can take a 25% lump sum from. This is somewhat less than I've been earning per annum, but I can last on it for a year until I can get my Aussie super.

I know I have to declare the lump sum to the ATO because it's taxable here in Australia, but do I need to inform the HMRC or complete a British tax return? Also, can I draw the remainder of my British pension at at $18,200/annum (the tax-free threshold) and withdraw my Aussie super at the same time - without paying tax on any of it? 

Many thanks in advance to anyone who can advise.

[Sloth]

Why would you complete a UK tax return if you're resident for tax purposes in Australia?

[InnerVoice]

3 hours ago, Sloth said:

Why would you complete a UK tax return if you're resident for tax purposes in Australia?

I'm not entirely clear on the process, which is why I asked the question. I wasn't sure if I'd need to inform the HMRC that I was an Australian resident for tax purposes. My understanding is that once you start drawing the other 75%, the pension provider deducts tax at source if you're a UK resident, so how do you obtain the tax back on that money back if you're an overseas resident?

[Tulip1]

Might be worth speaking to Alan Collett from Go Matilda.  I believe he is an expert in both UK and Australian tax.  

[rammygirl]

The 25% will be taxed but with my recent lump sum (from local gov pension) only the growth from when I became an Aus resident was taxed. So not the full amount. I obtained a valuation from the pension on that date. Not sure if this will be the case for you.

The remaining payments were taxed at source until my UK tax code was changed. I had to fill in a form and return it to the ATO who then sent it to HMRC who told the pension company not to tax at source. This took some time! I lodged a UK return to claim the tax paid to HMRC. I did use an accountant (qualified in UK and Aus )who advised me though.

[InnerVoice]

8 minutes ago, rammygirl said:

The 25% will be taxed but with my recent lump sum (from local gov pension) only the growth from when I became an Aus resident was taxed. So not the full amount. I obtained a valuation from the pension on that date. Not sure if this will be the case for you.

The remaining payments were taxed at source until my UK tax code was changed. I had to fill in a form and return it to the ATO who then sent it to HMRC who told the pension company not to tax at source. This took some time! I lodged a UK return to claim the tax paid to HMRC. I did use an accountant (qualified in UK and Aus )who advised me though.

@rammygirl thank you so much! This was exactly the information I was looking for. I'd assumed that the full 25% would be treated like income, so it would seem as though the ATO acknowledges this is a tax-free component - just as Aussie super is tax-free once you reach preservation age.

So is the remaining 75% just classed as income then, and taxed accordingly? And when I am 60 will I still be able to use my $18,200 tax-free allowance and draw my super at the same time, or do you lose that when you retire?

[Alan Collett]

Happy to have a freebie initial chat.

If of interest please feel able to complete the enquiry form at www.bdhtax.com

Best regards.

[Ken]

On 19/12/2022 at 09:24, InnerVoice said:

@rammygirl thank you so much! This was exactly the information I was looking for. I'd assumed that the full 25% would be treated like income, so it would seem as though the ATO acknowledges this is a tax-free component - just as Aussie super is tax-free once you reach preservation age.

So is the remaining 75% just classed as income then, and taxed accordingly? And when I am 60 will I still be able to use my $18,200 tax-free allowance and draw my super at the same time, or do you lose that when you retire?

Unfortunately it's a bit more complicated. The ATO deems that the growth in your pension (the taxed portion) is the first part you draw down and the tax-free portion (the value when you moved to Australia in the case of a lump sum) is the last part you draw down. There is also a big difference between lump sum drawdowns and pension payments that you need to be aware of, since pension payments are generally less favourably treated - although you can get a deduction for amounts you paid-in in the past. The treatment is different for final salary type schemes where the lump sum and the pension are treated separately and so the lump sum growth since you moved to Australia can be deducted at the time of receiving it.

Yes, you do still get the tax-free allowance after you retire and most Super payments (not all because there are exceptions where people have untaxed amounts in their Super) aren't taxable income and so don't touch your allowance.

Edited December 21, 2022 by Ken

[InnerVoice]

Thank you @Ken for this additional information which is appreciated, but a little disappointing when I thought I had it all worked out! Clearly I will need to take some professional tax advice before I make any big decisions.

We intend to stay in Australia until my wife gets her Aussie citizenship, which will be about 2 years from now, and then spend the early part of our retirement in Europe. We'd planned to take advantage of Portugal’s non-habitual residence (NHR) regime for 10 years, and then return to Australia when I'm in my late 60s. We also considered moving back to the UK for a year so I could get the 25% lump sum tax free, but that seems like more trouble than it was worth given that Portugal would only tax my UK pension at a flat rate of 10% anyway.