Case Studies

Case Study: Transferring a UK Pension

October 24, 2023
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Transferring a UK State Pension

We have assisted a significant number of clients transfer their pension benefits from the UK but to be clear no two clients and their circumstances have ever been the same so it will always be important for you to seek professional financial advice before you act on any benefits you have accrued in the UK.

Below is just one case that Thomond Asset Management worked on in 2022 and for the purposes of guidance we will outline briefly how we successfully advised our client. There are a lot of factors to consider when providing a client with financial advice which go far beyond this paper. Here we will outline, in general terms, what ultimately happened with his UK pension assets. Please bear in mind that this client’s situation required very specific tax guidance which was provided by an external tax consultant with experience in international tax planning. It was also given at a point in time so care must be taken when considering the information in this paper as legislation can change periodically rendering any past advice invalid.

The Case

Our client is an Irish national who had worked in the UK for approximately 15 years and had decided that he wanted to return to Ireland. The challenges faced during the COVID years encouraged him and his wife to consider returning to Ireland. His wife is Italian and they could move to or retire in Italy at a later date.

His senior positions with various employers had allowed him to accumulate significant “Defined Contribution” pension assets, approximately £750,000. Defined contribution simply means his pension entitlements are based on contributions from himself and his employer.

As an Irish citizen our client is also considered a European citizen, an important distinction which we will see later. As mentioned earlier, both he and his wife were considering moving from the UK. He had worked for 15 years as a senior executive for several firms in the Aircraft Leasing industry. It is his intention to work in a similar field and position, and it remains a possibility that he may have to work for another company located in another EU country.

He has 4 pension accounts with 4 different insurance companies, all of which are defined contribution pension schemes. As mentioned, he has accumulated approximately £750,000. He was 54 at the time of our initial discussions leaving him with approximately 11 years to retirement.

His initial questions to us were:

1. As the funds are currently invested in pounds sterling, can I change to a Euro denominated portfolio to more accurately reflect the currency I will eventually use?

2. Can all four pension accounts be consolidated into a single account?

3. As he is married and has 2 children, he wanted to understand the inheritance tax position?

4. I’ve noticed that my funds are not performing very well and there isn’t much choice available other than those offered by the life assurance companies. What are my options?

5. As annuity rates are very low, is there a way to increase potential income in retirement?

6. He knows she can take 25% of his funds in cash, free of UK tax. How would that be treated in Ireland or elsewhere in Europe?

7. Retiring abroad is now a consideration as his wife, who is an Italian, has inherited property in Italy. He wants to know how his pensions will be treated if he relocates to Italy in retirement?

Before we answer the client’s questions, there were a few things that we had to consider. In this instance, our client, is an international professional and importantly not just an Irish citizen but also a European citizen. This is an important distinction as this is an example of a QROPS case. 

A QROPS or “Qualifying Recognised Overseas Pension Scheme”. Simply put, it is a transfer of an individual pension fund from one country to another. Legislation exists which enables these transfers, although individual countries can decide for themselves whether to allow them or not.

It’s very important for anyone considering transferring their pension assets to be fully aware of how the any legislation affects them, and we would always advise engaging the services of suitably qualified advisers to make an initial assessment.

For the purposes of this paper the answers will be brief, but it must be noted that behind most simple answers is a range of technicalities that would also need to be considered and resolved. Addressing each point in detail is beyond the purpose and scope of this paper.

The Answers

1. Assuming the pension assets transfer from the UK to a QROPS, any pension funds invested can be held in any freely convertible currency available globally. In this case, he would opt for a Euro denominated portfolio. This eliminates any current or future currency risk on his pension plan.

2. One of the benefits of a QROPS is that it is possible to consolidate all your pension plans into a single account. This is particularly important for those with multiple accounts and if any were small accounts transferring them individually could be expensive and financially not worthwhile.

3. On death the pension assets will pass to his estate, gross of any inheritance tax, but depending on tax residency, the estate will need to make a declaration to the relevant tax authorities.

4. Another major advantage of investing in a QROPS is the availability of ‘open architecture’ for the underlying investments. Simply put, this means he can invest in almost any investment fund available worldwide. This is in contrast to his current position where he would only be able to invest in the funds available from the life assurance company.

5. Although UK legislation is changing to allow you to withdraw more income from annuity-based plans, there are conditions that need to be met before flexibility is allowed. Most QROPS allow income withdrawal at 20% higher than the usual UK rate by applying UK GAD (Government Actuarial Department) rates. So, yes, he can expect a higher income. If we combine this point with potentially better investment management, the difference will be even greater as his assets will be bigger.

6. The majority of QROPS allow up to 30% of a pension pot to be withdrawn at retirement. Care must be taken in terms of local tax legislation, as each jurisdiction has its own rules. For example, Ireland will allow you to take the first €200,000 tax free and tax the next €300,000 at 20%. So, if he moves to Italy to retire the prevailing Italian guidelines will apply.

The Guidance

You must always remember that advice is given at a point in time based on the adviser’s understanding of prevailing legislation and client circumstances, so you must always keep in mind that rules change, tax legislation changes and most importantly your circumstances evolve. 

So, in this instance what guidance did we offer?

From a technical view point we had the ability to offer the client a reasonable solution to his challenges, which we believed addressed all his questions. The issue we had was, he was still unsure as to where he was ultimately going to reside in retirement, Ireland, or Italy? Moving it immediately to Ireland which was perhaps the easier option but could lead to challenges at retirement if he was to relocate to Italy. 

In this instance our advice was to establish a QROPS for him in Europe, move all his UK pension assets to a new scheme. Although he didn’t specifically ask about the Lifetime Allowance legislation in either the UK or Ireland, the good news is a QROPS doesn’t impose Lifetime Allowance [UK] or a Standard Fund Threshold [Ireland]. So, rather than being penalised for future good investment performance, he will ultimately be rewarded as his pension assets can grow unrestricted, therefore making both his lump sum payment at retirement and future income potentially higher.

His ability to fund a pension in Ireland in now unaffected by his pension assets held in his QROPS. He could potentially fund a further €2 million in pension assets in Ireland as his QROPS was not attributed to any Irish earnings.

Retiring his QROPS is usually more straightforward, the only requirement being reaching age 50, meaning he could theoretically retire almost immediately but care is needed as there are now access restrictions due to HMRC rules. But short-term access wasn’t a factor in this instance.

This approach gave the client flexibility regarding where he was going to retire. For example, if the decision was to retire in Italy any payments from his QROPS could be made gross of income tax to Italy and he would only need to complete a tax return in the jurisdiction where he is domiciled.

In Conclusion

Transferring a pension from the UK to Ireland or any other jurisdiction is generally possible but there are quite a significant number of technical and personal factors to consider. In this instance the client’s pensions were held in a Defined Contribution scheme with no guaranteed benefits, other schemes, for example a Defined Benefit scheme can offer significant benefits which would be difficult to advise to give up. That said everyone’s circumstances are different and must be considered on a case by case basis. One must always seek guidance from an appropriately qualified adviser in advance of any significant changes to your pension assets.

Glossary

Qualifying Recognised Overseas Pension Scheme [QROPS]

The QROPS (Qualifying Recognised Overseas Pension Scheme) legislation came into effect on April 6, 2006. The legislation was designed to allow individuals with UK pension rights to transfer their pension funds to an overseas pension scheme if they were planning to move or retire abroad.

The introduction of QROPS aimed to provide greater flexibility and portability for pension savers who had accumulated pension savings in the UK but were no longer residing in the country or intended to retire in another country. QROPS enabled them to transfer their pension funds to a recognized overseas scheme that met certain qualifying criteria and regulatory standards.

Lifetime allowance [UK] 

In the context of UK pensions, the "Lifetime Allowance" (LTA) refers to the maximum amount of tax-advantaged pension savings an individual can accumulate over their lifetime without facing additional tax charges. It is a limit set by the UK government to control the amount of tax relief granted on pension contributions and growth.

The Lifetime Allowance is designed to ensure that pension benefits provided within tax-advantaged pension schemes remain within certain limits, preventing excessive tax advantages for higher earners and those with substantial pension savings.

Further information: https://www.gov.uk/government/publications/lifetime-allowance-guidance-newsletter-march-2023/lifetime-allowance-guidance-newsletter-march-2023

Standard Fund Threshold [Ireland]

In Ireland, the "Standard Fund Threshold" (SFT) is the maximum allowable value that a pension fund can reach without incurring additional tax charges. It is a limit set by the Irish government to control the amount of tax advantages that individuals can receive on their pension savings.

The Standard Fund Threshold applies to both occupational pension schemes and personal retirement savings accounts (PRSAs) and is designed to ensure that pension benefits provided within tax-advantaged pension arrangements do not exceed certain limits.

The current Standard Fund Threshold is set at €2 million. However, this threshold is subject to change by the government, and it may be adjusted periodically.

Further Information: https://www.revenue.ie/en/tax-professionals/tdm/pensions/chapter-25.pdf

 

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