Chancellor slaps 25% charge on people who move pensions abroad to dodge UK tax bills

• People still be able to shift pensions overseas tax-free if they and their pot are located in same country
• Stiff new penalty is aimed at those who retire to one country while parking their pension in an offshore tax haven

The Chancellor is to slap a 25 per cent charge on savers moving pension pots abroad where this is a blatant move to avoid paying tax in the UK.

People will still be able to shift pensions overseas tax-free if they and their pot are located in the same country, both are within the European Economic Area, or the scheme they transfer into is run by their employer.

The move is aimed at clamping down on people who, for example, retire to another European country while parking their pension in an offshore tax haven.

Placing restrictions on transfers in such cases means more savers are likely to leave their pensions in the UK, providing a welcome boost to Treasury coffers.

The crackdown could also end up deterring people from transferring pensions into jurisdictions where their savings are no longer protected by UK regulators, but by the local authorities.

At the moment, you have the option of transferring your pot abroad as long as the scheme at the other end – known in official jargon as a ‘QROPS’, which stands for Qualifying Recognised Overseas Pension Scheme – is approved by the UK taxman.

Although current rules have been tightened already, this is regarded as a pretty murky area of the pensions world, full of sharks who try to sign people up to unsuitable offshore schemes that are unregulated by the UK authorities.

Ahead of today’s Budget move – which takes effect from midnight – there was already speculation that people looking to transfer work or private pension overseas for convenience or tax reasons might face new curbs as a result of the pending Brexit negotiations.

The Treasury said of the new 25 per cent levy: ‘This charge is targeted at those seeking to reduce the tax payable by moving their pension wealth to another jurisdiction.

‘Exceptions will apply to the charge allowing transfers to be made tax-free where people have a genuine need to transfer their pension, including when the individual and the pension are both located within the European Economic Area.’

Tom Selby, senior analyst at AJ Bell, said: ‘QROPS transfer requests on or after 9 March will be hit with a 25 per cent tax charge.

‘Broadly, it look like there will only be an exemption to the tax charge where the individual and pension savings are in the same country, both are in the European Economic Area, or the QROPS is provided by the individual’s employer.

‘QROPS were originally designed to make it easier for people leaving the UK to retire to another country and take their pension with them. However, the structure has increasingly been manipulated by those looking to artificially cut their tax bills.

‘The introduction of a 25 per cent levy for transfers to a country where the individual is not residing should act as a severe deterrent to abuse of the system.’

David Hartles, private client principal at accountancy firm HW Fisher & Company, said: ‘While there are some limited exemptions, as of midnight people could be subject to a significant 25 per cent charge on transferring their UK pension pot to an overseas equivalent.

‘This has the ability to affect up to a quarter of a billion pounds of pension savings leaving the UK. There are exemptions, such as allowing for free movement of capital under EU rules, although how long this is available remains unknown.’

Andrew Tully, pensions technical director at Retirement Advantage, said: ‘This appears to be a significant shutting down of the QROPS market, restricting overseas transfers to situations where people have an overseas employer’s scheme or the QROPS is in the EEA.

‘The Government has been increasingly concerned about the use of these schemes for the past few years and this appears a major move to reduce their use.’

Les Cameron, head of technical at Prudential, said: ‘The government has been gradually reducing the attractiveness of QROPS for a number of years but this new 25 per cent charge, which applies to some transfers from midnight tomorrow, has come out of the blue.

‘Some transfers will still be able to go ahead but others will need to be stopped. Many will no doubt pause transfers until the detail of today’s announcement can be fully considered.

‘The last thing anyone wants is to incur an unplanned 25 per cent tax charge or possibly more if their intended QROPS decides to deregister themselves.’

Stuart Paton Evans, retirement propositions director at Scottish Widows, said: ‘The introduction of a 25% tax charge on transfers of UK pensions into Qualifying Recognised Overseas Pension Schemes will make them less appealing for savers wishing to avoid UK taxation.

‘There will be exemptions to allow pensioners with a genuine need to do this tax-free, particularly where the individual and pension scheme are situated in the European Economic area, the saver is moving to the country where the provider operates, or the transfer is to an occupational scheme sponsored by the individual’s employer.

‘This continues the tax clampdown on overseas pensions that was introduced in the Autumn Statement in 2016 and could also help reduce the opportunity for pensions scammers who have looked to utilise QROPS to scam pensioners of their savings.’

Gary Smith, financial planner at Tilney, said: ‘This would be an issue for ex-pats who say retire to Spain but transfer into a QROPS based in Guernsey, as this would incur the 25 per cent tax charge.’

Pension freedom raises tax haul from savers cashing in pots
Savers taking advantage of pension freedoms have shelled out nearly three times as much tax to the Treasury as originally forecast, new figures released by HMRC reveal.

The Government anticipated raising an extra £0.3 billion in 2015-16 and £0.6 billion in 2016-17 as people began seizing the opportunity to cash in some or all of their lifetime savings. It has now admitted raking in £1.5billion in the first year, while its estimate for the current tax year is £1.1billion.

Everyone aged over 55 now has unfettered access to their whole pension pot – but only 25 per cent of retirement savings are tax-free. The rest is taxed as income at the usual 20 per cent, 40 per cent and 45 per cent rates.

Those who dip too freely into their pension pot at retirement can end up in a higher rate tax bracket and on the hook to the taxman for more than they expected. Read more here on how to avoid this tax trap.

Vince Smith-Hughes, retirement expert at Prudential, said: ‘These figures raise interesting questions about how people are using pension freedoms.

‘It is clear from this data that the tax taken from pension freedoms is considerably higher than originally expected – this having been caused by larger withdrawals – including in some cases all of the fund being withdrawn in one go.

‘This will be the right decision for some people who have other income sources, but clearly is a concern if unsustainable levels of income are being taken.’

Chris Noon, Partner at Hymans Robertson said: ‘There are several reasons why the Government has collected more tax from freedom and choice than it originally estimated.

‘First, average withdrawals have been larger than anticipated. The Government assumed individuals would spread withdrawals over four years, which they haven’t.

‘This shows that individuals have been making suboptimal choices due to a lack of understanding of the tax consequences of their decisions. They’ve been stung with hefty tax bills as a result.

‘Second, many people with defined benefit [final salary] pensions will have converted some or all of this benefit to a defined contribution fund. They will then typically draw this money much faster than the defined benefit benefit would have been paid.’

Andrew Tully, pensions technical director, Retirement Advantage, said: ‘This is a tax bonanza for the Treasury and although a welcome boost to government coffers, will have been a nasty surprise for many people taking advantage of the new freedoms.

‘Paying tax on withdrawals was seen at the time as a natural brake on withdrawing too much too soon but this clearly hasn’t been the case.’