Transferring from the dark side – part four

Bringing pension scheme payments back to Australia from overseas is a complex process. In part four of this multi-part feature, Jemma Sanderson dispels some of the myths associated with UK pension transfers.

Following on from part three, and the complexities of United Kingdom pension transfers, including the consideration of multiple jurisdictions, there are many inaccuracies and areas that are misunderstood.

In part four of the series, we will bust some of the myths associated with these transactions.

Myths

Some of the questions we are asked about these transfers are as follows:

1. If I have benefits in the UK greater than my non-concessional cap, do I have to transfer to Australia over multiple years?

2. I already have more than $1.7 million in total

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Continued from previous page superannuation in Australia, does that mean I can’t transfer any more benefits to Australia other than the growth since I became an Australian resident?

3. If I have already started implementing a strategy for a multiple-step/year transfer, am I allowed to change my strategy and transfer within a shorter period of time?

4. I am in excess of my lifetime allowance, so will I have to leave my benefits above that in the UK or pay 55 per cent tax?

5. I have a defined benefit scheme, so does that prevent me from transferring my benefits to Australia?

6. If I’m under age 55, is it not worthwhile for me to consider doing anything with my UK benefits?

7. I have multiple accounts in the UK, so do I have to consolidate them before I transfer any benefits to Australia?

8. I transferred benefits from the UK to another jurisdiction prior to April 2015. Does that mean I can’t easily transfer those amounts to Australia?

9. I’ve just turned 55 and want to transfer my benefits to Australia. Will they be trapped in the superannuation system until my preservation age of 60?

Myth one – Benefits greater than the Australian non-concessional cap

The Australian superannuation contribution provisions are a very important consideration when looking to transfer funds from a UK scheme to Australia. As outlined previously, the amount that would be assessed towards this limit is broadly the balance in the individual’s UK schemes at the time they became an Australian resident, plus the value of any contributions they made since becoming a resident. Therefore, if the balance at that time was more than $330,000, that is a consideration.

However, just because the individual had a balance in UK accounts at their date of residence of greater than $330,000 doesn’t mean the benefits can’t be transferred to Australia in a tax-effective and timely manner.

Myth two – More than $1.7 million in an Australian super fund

As with myth one, the Australian superannuation provisions are a very important consideration when looking to transfer funds from a UK scheme to Australia. Where an individual has more than $1.7 million in superannuation in Australia, then their non-concessional contribution cap is likely to be nil.

As above, from a UK pension transfer perspective, the amount that would be assessed towards this limit is the balance in the individual’s UK schemes at the time they became an Australian resident. Therefore, if the individual doesn’t have any available non-concessional contribution cap as they have more than $1.7 million in superannuation in Australia, that is a consideration.

Myth three – Already implementing a multiple-year strategy

In the situation where an individual has already commenced the implementation of a multiple-phase approach to transfer their benefits to Australia doesn’t meant they are then limited by the original timing. In such situations, where this has been undertaken such that the benefits are already split into multiple self-invested personal pensions in the UK, it can make it slightly easier to then transfer the accounts remaining in the UK.

Therefore, partial implementation of a multi-year strategy doesn’t mean a new strategy can’t be implemented to transfer the benefits to Australia more quickly.

Myth four – Excess to lifetime allowance

Where an individual is in excess of their lifetime allowance (LTA) in the UK (currently £1,073,100), many believe they then can’t transfer any benefits to Australia without incurring a 55 per cent tax charge. This is not the case. If the benefits are transferred correctly, then the 25 per cent LTA charge may apply, however, there could be no further tax implications in Australia or the UK.

It is important when a member is in excess of their LTA that it is well understood how much of their LTA they may have available as they could have already used some of it by taking benefits from the UK previously. It is also important to ensure the implementation of any strategies are undertaken correctly. The incorrect implementation, including the liaison with the ATO and Her Majesty’s Revenue and Customs, could result in the 55 per cent tax charge being imposed, and no ability to claim back any credits.

One area where benefits may have already fully utilised the LTA is if an individual uses a pension commencement lump sum (PCLS) to take out a tax-free amount of up to the 25 per cent, when they had to crystallise 100 per cent. The remaining balance, or 75 per cent, would have been assessed towards their LTA. A PCLS is only available for 25 per cent up to the LTA, but there

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Continued from previous page could be uncrystallised benefits above the LTA that haven’t been dealt with due to the perceived 55 per cent tax result, as well as the crystallised amount remaining, plus any growth/earnings on that.

Myth five – Defined benefit scheme

Where a member has a defined benefit (DB) scheme in the UK is where the most value add arises with a transfer from the UK to Australia as these schemes are resulting in quite high transfer values. However, in order to undertake any transfer, the member needs to obtain advice from a pension transfer specialist (PTS) who is accredited to provide that advice by the UK Financial Conduct Authority (FCA).

Where that advice is provided, and the PTS signs-off with the relevant UK DB scheme, then the money can be transferred out of the DB scheme to Australia, if the individual is 55 or over, or to another UK scheme that is not a DB in operation.

There are a limited number of PTSs who can provide this advice as it is a very highly regulated sector in the UK. Therefore, it is important to consider the use of a PTS that is not just familiar with the transfer of a DB scheme to another UK scheme, but one who is familiar and experienced with transfers to Australia, particularly when you want to get the best outcome for clients.

Myth six – Under age 55

The individual’s age is very relevant to their ability to take a benefit out of a UK scheme, including transferring the benefits to an Australian superannuation account. Until the individual is age 55, they are unable to receive any benefits out of their UK scheme or undertake a transfer from the UK to Australia. However, it may still be worthwhile where the individual has a DB scheme in the UK to consider whether it is appropriate to transfer the DB scheme to another UK scheme, subject to PTS advice (see myth five). Upon them attaining age 55, or in the lead-up to that time, they could then consider their options to transfer the money into Australia.

Over the period of time leading up to age 55, the individual would have to have the nonDB scheme managed/invested, and therefore this is a consideration for that individual.

It is important to note the current pension age in the UK is 55, however, this is likely to increase over time, with those people born between 6 April 1971 and 6 April 1973 likely to have some transitional rules apply, and those born after 6 April 1973 having an applicable pension age of 57.

Myth seven – Multiple UK accounts

Where an individual has multiple schemes in the UK, they don’t have to be consolidated prior to any transfer.

In actual fact, having separate accounts can enable a more strategic transfer of the overall benefits to Australia with ultimate consideration of the timing.

It is not necessary to consolidate the benefits, however, in some situations this may be the most appropriate course of action. It will of course depend on the individual’s circumstances.

Myth eight – UK-sourced accounts in another jurisdiction

In the lead-up to April 2015, when there were substantial changes to the pension scheme rules in the UK, many expats transferred their UK money into recognised overseas pension scheme accounts in other international jurisdictions, including Malta, Guernsey and Gibraltar.

Where this is the case, these accounts are also able to be transferred into Australia. The main consideration with respect to these accounts are:

1. any exit fees that may apply – we have experienced situations where the exit fee within a particular period of time is very cost prohibitive to the individual and therefore this may delay the ultimate transfer,

2. the tax requirements of the particular jurisdiction prior to a transfer occurring – depending on the jurisdiction, clearance is required by the local taxation authorities. This generally results in the transfer taking longer, but is not prohibitive,

3. ensuring the scheme in the foreign jurisdiction satisfies the definition under the Australian legislation of being a foreign superannuation fund. By satisfying this definition, the individual is able to use the provision in Australia where only the growth in the account since they became an Australian resident is subject to tax.

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Therefore, such accounts can also be transferred into Australia.

Myth nine – Benefits trapped in an Australian super fund

There is a divergence between the UK pension age of 55 and the Australian preservation age of 60.

Accordingly, where UK benefits are transferred to superannuation in Australia they will be unable to be accessed until the individual reaches age 60 in Australia and satisfies a condition of release with a nilcashing restriction.

However, several of the strategies available for the repatriation of UK pension scheme benefits may not involve the benefits being transferred entirely into superannuation in Australia, instead being transferred to the individual personally. Therefore, benefits may not all be trapped in Australia upon transfer.

With myths busted and areas to be cautious of identified, part five of this series will delve into the strategies that enable UK pension scheme members to transfer their benefits to Australia in a tax-effective and timely manner.

These strategies have enabled the above myths to be busted and provided many UK expats with the certainty that their UK benefits can be transferred to Australia and managed effectively.