Hammond cracks down on overseas pensions transfers

People seeking to move their pensions out of the UK could face punitive tax charges under rules unveiled in last week's budget, with both Britons living abroad and foreign nationals based in the UK potentially affected. New rules on such transfers, which will take effect immediately, will mean savers have to pay a tax charge of 25% on their funds before moving the money, unless the transaction involves only European Economic Area (EEA) countries, or the funds are being moved to a country in which the saver now lives.

The rules are focused on qualifying recognised overseas pension schemes (QROPS). These are pension schemes based in around 40 countries that HMRC recognises as operating under similar rules as those that apply in the UK. While transfers to other overseas pension schemes already attract tax charges, it has been possible to move money into a QROPS tax-free.

However, while there are legitimate reasons for such a transaction a Briton retiring abroad, for example, or a foreign national returning home following a stint working in the UK QROPS have also been associated with aggressive tax avoidance, pension frauds and scams. On this basis, many have welcomed the chancellor's crackdown, but there is also concern that some savers will be unfairly caught out.

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In particular, the new rules might affect Britons retiring abroad to countries such as the US and Canada, which do not have QROPS set-ups with the UK. People seeking to move pensions there have therefore tended to transfer their money through third-party jurisdictions, such as Malta, Gibraltar and Singapore, where QROPS are available and the local tax rules are benign. Such moves could now fall victim to the new tax charges.

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While the Treasury estimates the QROPS measures will raise a relatively modest £65m-£120m a year, the effect could be that savers who don't meet the tighter criteria laid out by the chancellor will now find it difficult to get their money out of the UK. Some will face the choice of leaving their pension fund in the UK and trying to draw it from overseas when they take their retirement benefits, or being forced to take a sizeable hit on a transfer.

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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.