Pension transfer to Aus & possible later return to UK - Crucial Info / Questions

[Guest kavey]

Hello

 

I wonder if anyone can make suggestions with regard to the points below.

 

I have been living in Australia for short time and am looking at possible transfer of my UK personal pension to an Aus Superannuation scheme.

 

Today (Mon 28 May 07) there has been news that via one of the major Super providers that HMRC will *not* remove QROPS approval status of Aus Super schemes from 1 July (as had been rumoured). Assuming that this is the case (and I will be phoning HMRC this evening to get their take on it - wish me luck!) there is no longer any urgency to get the funds out of the UK before 1 July (though I do appreciate that there will be Aus tax of 15% on the growth since residency date if over 6 months).

 

Q1. (This may be impossible to answer at this point, but here goes anyway): Given that the issue which caused the potential 'problem' with QROPS status after 1 July will remain (namely the fact that Aus Super will not be taxed at the point of withdrawal, will HMRC impose any 'special' conditions on UK Pension transfers to Aus QROPS schemes? (i.e. conditions which do not apply currently and/or which do not apply to transfers to QROPS scehems in other countries)

 

If someone is going to retire in Australia, the argument for moving the pension funds over to Super seems quite compelling (no need to worry about possible FIF tax on the growing UK pension, greater flexibility in investment, much greater flexibility on how to draw the funds in retirement, completely tax-free withdrawals in retirement).

 

However:

 

Q2. As I understand it, UK pensions grow tax-free, but Aus Super is taxed at 15% year-on-year on the growth in the fund. (I have heard that the 15% applies to *income* within the Super fund (e.g. dividends, interest), but that capital gains within the Super fund (due to selling shares etc.) are taxed at a llower rate, possibly 10%). Is all this correct?

 

Q3. Whatever the overall rate of tax, does this mean that, ignoring all other tax-related and investment considerations, an Aus Super account will effectively increase in value at a slower rate than an equivalent UK pension fund due to the 'drag' imposed by the tax?

 

 

The decision whether or not to move the funds across is a bit more tricky is there is a possibility of a return to the UK (I realise that this cannot be a pre-meditated 'intention', otherwise it would not be legitimate to move the funds out of the UK pension - but things change, and there have been quite a lot of migrants who have returned to their country of origin for family or other reasons.)

 

If the pension is still in the UK and has not been causing Aus tax issues during the period of residency in Aus, then things are relatively straightforward, it seems.

 

However:

 

Q4. If the pension has been transferred to Aus Super, then it will not be possible to transfer it back to the UK as Aus law does not allow transfers outside the country before 'preservation' (i.e. retirement) age - at least 55 (or older). So the money will have to stay in the Aus Super fund. Is this correct?

 

Q5. *Crucial Question': Assuming that the money stays in the Aus Super fund and is growing (with growth taxed as described above, and the member is now resident in the UK, is any UK tax (either income tax or CGT or anything else) payable in the UK on the growth of the Aus Super fund? What I am really getting at is: Does HMRC recognise an Aus Super fund as having the same 'tax-free-growth' status as a UK pension fund? If the answer is that UK tax *is* payable on Aus Super growth, and the member is in a high UK tax bracket, the effect could be crippling on the growth of those retirement funds - the member would be severely penalised for having moved their money from a UK pension fund to Aus Super. (I realise that any Aus tax paid would be allowable as a foreign tax credit, but this would in no way compensate for having for pay UK tax on the growth of the money.)

 

Q6. At Australian retirement age, the member can take as an unlimited amount of their Super as a lump sum (a major difference from the UK system, where it is limited to 25% of the total, the rest needing to be used to purchase an annuity, which is what actually pays a UK pension monthly income). Is this correct from the Aus and UK perspectives?

 

Q7. If the UK retiree leaves some or all of their Aus Super fund intact, they can draw a monthly income in the UK from the Australian fund and will be taxed in the UK in exactly the same way that any other source of income is taxed (including a UK pension - i.e. there is no distinction between pension and earned income, domestic or foreign - it is all lumped together and taxed through the income tax system prevailing at the time). Is that correct?

 

Q8. *Crucial Question*: If, on reaching Aus retirement ('preservation') age, the retiree in the UK decides to 'cash in' their Aus Super fund and take the lump sum, is UK tax of any sort applicable when this (fairly large) amount is transferred to the UK? If this amount (hundreds of thousands of dollars) were treated as 'foreign income', the income tax would be ruinous.

 

All thoughts. and pointers welcome

[Guest Abi&Dan]

Hiya, welcome to PIO.

 

First of all - you need an IFA!! These questions are pretty complex and would certainly need someone to look at your own personal circs to see what the most appropriate action is for you to take.

 

However, on general terms - the removal of QROPS status for superannuation schemes was a bit of a shocker - not heard that (though wouldn't to be fair until checking the QROPS list for a specific scheme).

 

You should note that your specific named Super needs to be on the QROPS list - it's not blanket approval and is given on a scheme by scheme basis when they apply for it.

 

http://www.hmrc.gov.uk/pensionschemes/qrops-list.pdf

 

Once of the principal reasons for individual's rushing TVs prior to 01/07/07 is that is the new Oz tax year and after that date the tax free investments for TVs into Oz schemes reduces from $1mill to $450k (and that's using 3 years of limit).

 

UK pensions are taxed on all dividends - so growth not entirely tax free if your policy is invested in shares in any way.

 

You're right in the fact that QROPS was set up due to the lump sum status of Oz schemes. What I don't know is whether the schemes who obtain QROPS approval have to make any concession with how much cash they agree to pay.

 

Sorry can't be more help with your other questions - but definitely one for an IFA!

 

Cheers

[Guest kavey]

Hi Abi and Dan

 

Thanks for your reply.

 

I have talked to number of financial advisers here in Oz as well as a number of accountants, and none has been able to answer all these questions, let alone advise whether I would be better to transfer the pension or not taking these factors into account.

 

I don't really agree that these questions are complex - broken down into the various points as per my list, each item is quite self-contained and should have a distinct and self-contained answer. I am endeavouring to find each of these answers from various sources and am hopeful that some info can come from this forum.

 

What *will* be complex is processing the various factors and coming to a decision when there is uncertainty about the ultimate country of retirement. I am sure that I'm not alone in this situation.

 

There definitely was an issue about Australian Super funds losing their QROPS status after 30th June. This was because the current QROPS rules require pension monies to be taxed upon withdrawal, and the new Australian Super rules do not meet this. However, I have been informed by a couple of reliable sources that, in the last few days, HMRC have decided to relax this requirement for Australian Super funds because Super is taxed in the growth phase (and that will be good enough - thank goodness).

 

Thanks for the info about tax on dividends in UK pension funds - I wasn't aware of that, and it's another piece of the jigsaw.

 

Any other information from anyone is welcome.

 

Cheers

Kavey