How an Australian ROPS Can Help You to Avoid the 67% UK Tax Trap
For British expatriates in Australia, managing UK pension funds is a vital aspect of retirement planning. Without proper planning, your pension funds could fall into the 67% tax trap, where a significant portion of your hard-earned wealth is effectively passed to HMRC, rather than your family and intended beneficiaries.
This punitive level of taxation arises from the combination of UK Inheritance Tax (IHT) on pension assets and the beneficiary’s Income Tax on withdrawals. But the good news is that transferring your UK pension to a Recognised Overseas Pension Scheme (ROPS) in Australia can mitigate this significant risk, offering a secure, tax-efficient solution that aligns with your financial goals.
Understanding the 67% UK Tax Trap
The “67% tax trap” occurs when UK pension funds are subject to two layers of taxation:
1. UK Inheritance Tax (IHT)
From April 2027, pension funds left in the UK will be included in the deceased’s estate and taxed at 40% if the estate exceeds the £325,000 standard nil-rate band. For those qualifying for the residence nil-rate band, the threshold rises to £500,000—but many high-net-worth expats still find their estates above these limits.
2. Beneficiary Income Tax on Withdrawals
Beneficiaries inheriting the pension [if death occurs after the age of 75] may then pay Income Tax on withdrawals, taxed at their marginal rate, which can reach as high as 45% [or 47% in Scotland].
Together, these taxes could reduce a £1 million pension to just £330,000 - an effective loss of 67% to taxation. Understanding this risk is crucial for expats who want to safeguard their legacy.
How a ROPS Can Protect Your Pension
A Recognised Overseas Pension Scheme (ROPS) offers a tailored solution for British expats to efficiently manage and preserve their retirement savings. This section explores the core benefits of transferring your pension to a compliant ROPS in Australia.
Exemption from UK IHT
From April 6th 2027 pension assets held in a UK scheme will be considered part of your estate and therefore subject to IHT. By transferring to a ROPS, you remove your pension from the scope of UK IHT, ensuring that your wealth can pass directly to your beneficiaries without a significant tax burden. This can make a substantial difference to the legacy you leave.
Additionally, an Australian ROPS, if correctly established, functions as an ‘excluded property trust’, eliminating the risk of future legislative changes to the tax treatment of UK pension funds retrospectively impacting your assets and your legacy.
Favourable Australian Tax Treatment
Australia’s tax system provides significant advantages for superannuation [‘super’] accounts, especially after the age of 60. At this stage, investment growth within your super fund and withdrawals made by you or your dependents are generally tax-free. Transferring your UK pension to a ROPS aligns your funds with this favourable regime, providing a robust platform for long-term financial security.
Simplified Estate Planning
A ROPS helps streamline your estate planning by ensuring that your pension aligns with Australian regulations and inheritance laws. This not only reduces complexity but also maximises the wealth you pass on to loved ones.
Currency and Investment Management
Keeping your pension in the UK exposes it to GBP-AUD exchange rate volatility which could significantly impact the potential future value of your pension fund over time. Since 2001 for example, the Pound has fallen in value by 27% in relation to the Australian Dollar. Transferring your UK pension funds held in GBP sterling into an Australian ROPS held in AUD Dollars could mitigate this potential risk.
Worked Example: The 67% Tax Trap vs ROPS
Scenario: Sarah, a 58-year-old British expat in Sydney, has a UK pension valued at £800,000.
Without a ROPS Transfer:
- Upon Sarah’s passing, her pension would be taxed at 40% IHT (£320,000), leaving £480,000 for her beneficiaries
- If Sarah dies age 75 or over, her beneficiaries, who are high earners in the UK, withdraw the remaining amount and pay Income Tax at 45% (£216,000).
- Total tax burden: £536,000, leaving just £264,000 for Sarah’s heirs - an effective tax rate of 67%.
With a ROPS Transfer:
- Sarah transfers her pension into an Australian ROPS, removing it from UK IHT.
- In Australia, her beneficiaries can withdraw the funds tax-efficiently under superannuation rules, potentially avoiding significant tax charges.
Result: Sarah’s heirs retain the majority of the pension wealth, preserving her legacy.
Case Study: Avoiding a Costly Mistake
Paul’s Experience
Paul, a British expatriate in Melbourne, was unaware of the risks of leaving his £1.2 million pension in the UK. Upon his unexpected passing, on April 6th 2027, at the age of 75, the pension faced a £480,000 IHT bill, reducing the fund to £720,000.
Paul’s children, both UK higher rate taxpayers, subsequently paid an additional £324,000 in Income Tax on withdrawals, reducing the amount effectively bequeathed to them from £1.2 million to £396,000.
After learning about ROPS too late, Paul’s family realised they could have preserved nearly the entire £1.2 million, had he acted sooner. A ROPS transfer would have exempted the pension from UK IHT and allowed for tax-efficient withdrawals under Australian law.
Take Action to Safeguard Your Pension
The 67% UK tax trap is a real and costly risk for expats leaving their pensions in the UK. Transferring to a ROPS is a proactive step that can preserve your wealth, simplify estate planning, and provide significant tax advantages.
At Forth Capital, we specialise in guiding British expatriates in Australia through the complexities of pension transfers, ensuring a tailored solution that meets your financial goals.
Contact us today to arrange an initial consultation, to take control of your financial future.

Mark Plummer
International Financial Planner
Mark is a dual qualified International Financial Planner, holding the UK CII (Chartered Insurance Institute) Level 4 Qualification and the Australian Diploma in Financial Planning. Mark helps clients across Australasia make the best financial decisions by providing advice on their pensions, tax planning, and any other matters related to their personal financial planning and wealth management. If you want to discuss your financial planning needs, please contact me or schedule an initial, no-obligation meeting through my online calendar.
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This communication is for information purposes only and does not constitute financial, legal, or tax advice. Please schedule a meeting to receive advice on financial planning, wealth management, and pension solutions.
FAQs
While most UK pensions can be transferred, UK State Pensions cannot be transferred to a ROPS.
An international dual-qualified UK/AUS financial advisor can assess your specific situation to determine the suitability of transferring your UK pension to an Australian ROPS.
Transfers exceeding the UK Lifetime Allowance (£1,073,100 for 2023/24) may incur a tax charge, but the long-term savings often outweigh the initial costs.
It’s important to be aware that there are also some limits in Australia on transfers; notably, the value on the date of arrival must be less than the non-concessional contributions cap in the tax year of the transfer. This cap is currently AUD $360,000. This does not make a transfer impossible, merely more complex.
The transfer process typically takes approximately seven months and involves compliance checks to ensure the receiving scheme qualifies as a ROPS under HMRC rules.