Australian resident taking lump sum from UK pension - how is this taxed in Australia?

[Wanderer Returns]

Hi, I want to take a lump sum from my UK SIPP.

I've read that Australia taxes the growth since you became a permanent resident. In my case this is roughly 50%. Using some arbitrary figures, if the value of my SIPP is now £150,000 then the growth part would be about £50,000.

So if I took a 25% lump sum (which would be tax-free in the UK), would I be taxed on just that amount (i.e. £37,500), or would I be required to pay tax on the growth of the whole fund - the full £50,000?

Secondly, is there anything I can do to make the above process more tax efficient?

Thanks in advance.

[Andrew from Vista Financial]

Hi

Your calculation is broadly correct however there can be in some cases more to it, ie any contributions in/transfers in(out)/withdrawals etc to the Pension since arrival.

In relation to the amount of tax that would apply, the growth which is known as Applicable Fund Earnings (AFE) is typically front loaded into withdrawals/transfers out.

Generally, this cannot be more than the amount received/transferred therefore in the above example it would be contained to the £37,500 received.

In terms of doing anything to make the process more tax efficient....perhaps but there is not enough information to go off and without understanding your personal situation and goals and objectives not really possible to know the suitability of any options however the below could/should be considered: 

• Tax Deductible Contributions to Super (subject to contributions caps and taxable income)
• Instead a transfer to an Australian Superannuation (QROPS).  

Regards

Andy

Edited May 1 by Andrew from Vista Financial

[Ken]

3 hours ago, Wanderer Returns said:

Hi, I want to take a lump sum from my UK SIPP.

I've read that Australia taxes the growth since you became a permanent resident. In my case this is roughly 50%. Using some arbitrary figures, if the value of my SIPP is now £150,000 then the growth part would be about £50,000.

So if I took a 25% lump sum (which would be tax-free in the UK), would I be taxed on just that amount (i.e. £37,500), or would I be required to pay tax on the growth of the whole fund - the full £50,000?

Secondly, is there anything I can do to make the above process more tax efficient?

Thanks in advance.

As Andrew as said you'd be taxed on the £37,500. If you withdrew £50,000 utilising both the 25% tax free and your UK tax free allowance (assuming you don't have any other UK income) then it would be tax free in the UK but you'd be taxed on the full £50,000 in Australia.

The following year if your Pension Plan didn't grow at all, then if you took another £12,500 lump sum using your UK tax free allowance then that £12,500 would be tax free in Australia too. If on the other hand your Pension Plan had grown by another £5,000 then £5,000 would be taxable and £7,500 tax free.

If, however, you chose to take the 75% as a Pension rather than as additional lump sums then it would normally all be taxable income in Australia (so you lose out on getting anything tax free). You can however apply to get the payments paid tax free from the UK with an NT tax code without needing to worry about the annual allowance.

Pay attention to the timing of when you take lump sums. If you take a lump sum in April, only 1/12th of your annual allowance will be available and you'll need to claw back the overpayment at the year-end (you can only get an NT tax code for pensions, not lump sums). Furthermore, the payment will be in the year ended 30th June in Australia and not in the following year, and you'll probably still be waiting for your UK tax refund in June of the following year.

I don't know if UK pension funds allow the 25% lump sum to be paid in more than one payment. If they did, getting it paid in two instalments (say one in June and one in July) would offer a tax saving, as of course would waiting until you are retired when you don't have any other income and have a large tax free amount due to SAPTO.

If you are still working and paying a high tax rate you might want to consider paying the lump sum into Super where it will be taxed at 15% rather than your marginal tax rate.

Edited May 1 by Ken

[Wanderer Returns]

Andy and Ken, thank you both for your very helpful information.

19 hours ago, Andrew from Vista Financial said:

In terms of doing anything to make the process more tax efficient....perhaps but there is not enough information to go off and without understanding your personal situation and goals and objectives not really possible to know the suitability of any options however the below could/should be considered: 

• Tax Deductible Contributions to Super (subject to contributions caps and taxable income)
• Instead a transfer to an Australian Superannuation (QROPS).

Unfortunately I will need the money in the next few months, which is why I'm considering taking the lump sum at this time. I don't have any available funds to make additional contributions into my Australian super, so I don't think the first suggestion (above) is going to help. And in both cases my money would remain in superannuation until I'm 60, although only having to pay concessional rate tax of 15% on the applicable fund earnings amount would be far more preferable.

 

18 hours ago, Ken said:

I don't know if UK pension funds allow the 25% lump sum to be paid in more than one payment. If they did, getting it paid in two instalments (say one in June and one in July) would offer a tax saving

I've checked with them and my UK pension provider will allow me to take the 25% lump sum in more than one payment, so I definitely intend to do this.

 

18 hours ago, Ken said:

The following year if your Pension Plan didn't grow at all, then if you took another £12,500 lump sum using your UK tax free allowance then that £12,500 would be tax free in Australia too. If on the other hand your Pension Plan had grown by another £5,000 then £5,000 would be taxable and £7,500 tax free.

If, however, you chose to take the 75% as a Pension rather than as additional lump sums then it would normally all be taxable income in Australia (so you lose out on getting anything tax free). You can however apply to get the payments paid tax free from the UK with an NT tax code without needing to worry about the annual allowance.

Pay attention to the timing of when you take lump sums. If you take a lump sum in April, only 1/12th of your annual allowance will be available and you'll need to claw back the overpayment at the year-end (you can only get an NT tax code for pensions, not lump sums). Furthermore, the payment will be in the year ended 30th June in Australia and not in the following year, and you'll probably still be waiting for your UK tax refund in June of the following year.

Just to clarify, if I was to make further withdrawals as lump sums rather than taking them as a pension, I'd only get taxed on the growth in the fund? And the best time to take a lump sum would be in March so my provider wouldn't withhold any (or very little) tax, and I wouldn't need to reclaim it from the HMRC. Is this correct?

[Ken]

2 hours ago, Wanderer Returns said:

Just to clarify, if I was to make further withdrawals as lump sums rather than taking them as a pension, I'd only get taxed on the growth in the fund? And the best time to take a lump sum would be in March so my provider wouldn't withhold any (or very little) tax, and I wouldn't need to reclaim it from the HMRC. Is this correct?

Yes, once you've been taxed on all the growth in the fund any further lump sum withdrawals are treated as withdrawals of capital which are tax free.

Edited May 2 by Ken

[Wanderer Returns]

19 hours ago, Ken said:

Yes, once you've been taxed on all the growth in the fund any further lump sum withdrawals are treated as withdrawals of capital which are tax free.

That's good to know. Is that regardless of whether you make those withdrawals monthly, or as a one-off withdrawal at the tax year?

[Ken]

On 03/05/2024 at 08:12, Wanderer Returns said:

That's good to know. Is that regardless of whether you make those withdrawals monthly, or as a one-off withdrawal at the tax year?

If you are in receipt of a pension the rules are different than for lump sums. Taking a lump sum every month risks the payments being interpreted as a pension so I'd strongly advise against doing that.

That said I'm not aware of anything in written or case law that specifically says taking a lump sum every month either does or does not make it a pension, but even if you win you don't want to be the one who has to go to court to create the case law.

I should also spell out that when I said "any further lump sum withdrawals" I mean after the most recent growth in the fund has been accounted for. Just because you've paid the tax on all the growth at one point doesn't mean that's all you'll ever have to pay, as the money left in the fund should continue to grow.