How to solve your multi million pound pension problem

Insight | by Stephen Kiggins
HMRC Building

With a UK general election looming and Labour committed to re-instating the UK pension lifetime allowance charge [LTA] if they get the keys to Downing Street later this year, those with multi-million pound UK pensions will be acutely aware of the adverse impact this will have on their funds, and want to understand the solutions available, whilst a window of opportunity still exists.

In the 2023 Spring Budget, Chancellor Jeremy Hunt announced that the UK pension Lifetime Allowance (LTA) - set at £1,073,100 - would be scrapped (from April 2024) in a bid to stem the premature retirement of senior NHS professionals (which was resulting from the punitive taxation of their pension funds in excess of the LTA).

These changes also benefited an estimated two million UK private pension holders with pension pots that were expected to exceed, or had already breached, the £1,073,100 LTA. Previously, these individuals would have incurred a 55 per cent tax on any lump sum withdrawn above the LTA threshold, or a 25 per cent charge in addition to income tax on regular withdrawals, so the Chancellor’s announcement was understandably welcomed by those with million pound plus pension pots.

However, less than 24 hours after Hunt’s speech, Shadow Chancellor Rachel Reeves pledged that Labour would bring back the LTA if they were to win the next general election. So, if Labour’s current 25-point lead1 in the polls does indeed translate into victory at the next election (which must be held before 28 January 2025) then the window of opportunity is narrow.

Two million UK pension holders will be adversely impacted
by the re-instatement of the Lifetime Allowance charge.

So, as a British expat, if you believe that your UK pension could be subject to LTA charges if re-instated in the future, then a potentially elegant solution could be to look at the opportunity provided by an HMRC Recognised Overseas Pension Scheme (ROPS). This would effectively crystallise your pension benefits, by transferring them to an offshore pension plan [recognised under UK HMRC rules to accept transfers from UK pension schemes], whilst the LTA is not in effect.

This would effectively crystallise your pension benefits
whilst the Lifetime Allowance is not in effect.

A ROPS may be available to you if you are resident in the EEA [defined as the EU plus Norway, Liechtenstein, and Iceland] and intend to remain resident there for five full years after your pension transfer. It may also be available to you if you are resident in a country with its own ROPS such as Australia.

A ROPS also has the potential to offer additional advantages. Instead of being restricted to £GBP in the way that UK pension schemes are, a ROPS will allow you to hold and invest your funds in any currency – for example, the currency of the country where you plan to retire, to mitigate currency risk – and 100% of your pension funds will be passed to your beneficiaries, regardless of your age, when you die.

Any transfer of your pension funds should however not be undertaken lightly and if you want to explore this opportunity further then it’s important that you take expert advice from a dual qualified international pension advisor.

Working with a qualified adviser will ensure that you mitigate the overseas transfer charge, as getting this wrong will be expensive (potentially leading to a charge of 25% of the value of the pension pot) and it’s important to establish that an offshore scheme such as a ROPS would be the right option for you, depending upon your individual circumstances.

If your pension will be adversely impacted by the re-instatement of the LTA and want to find out whether an HMRC Recognised Overseas Pension Scheme could be the right solution for you click here to schedule an initial consultation with one of our advisors - and to download our Guide to UK Pension Transfers click here.

Source: YouGov [8 Feb 2024] and Statista [8 Feb 2024]

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