Losing a protected LTA
On the flip side, fixed protection (and also enhanced protection) may be lost if the value of a transfer payment is not equal to the value of the pension rights being transferred, such as a formally enhanced CETV. As employers increasingly look to close schemes or sell liabilities to insurers, in order to remove an open-ended and unquantifiable liability, enhanced CETVs are sometimes offered.
The LTA and working abroad
Where an individual is working abroad but is a member of a UK scheme, they may not receive UK tax relief on contributions to, or the accrual of benefits under, a registered pension scheme. Yet the resulting benefits may count towards benefit crystallisation events. For this reason, the individual’s lifetime allowance may be enhanced by a factor which is called a ‘non-residence factor’ which takes into account the value of the contributions/accrual that did not receive UK tax relief.
The LTA and returning to the UK
Where an individual transfers from a Recognised Overseas Pension Scheme (ROPS) or a Qualifying Recognised Overseas Pension Scheme (QROPS) back to a UK relevant scheme such as a Self-Invested Personal Pension, the individual’s lifetime allowance may be enhanced by a factor which is called a ‘recognised overseas scheme transfer factor’. This takes into account the value transferred back to the UK (not including any contributions to the ROPS or QROPS which had UK tax relief).
2. Death benefits
Being able to pass on pension benefits upon death, free of UK inheritance tax (IHT) from DC plans, is often considered highly attractive. However, where an individual dies within two years of making a transfer from a DB scheme, executors are required to report this to HMRC. Where the person was in poor health when the transfer took place (for example, expecting to live for less than two years) then an IHT charge can arise. So if death benefits are a key driver due to the ill health of a member, being aware of the IHT position is critical.
Income tax also needs to be considered. For deaths under the age of 75, the death benefits of a DC scheme are not charged to a UK tax resident beneficiary. For a spouse’s or dependent’s pension from a DB scheme this is not the case.
For deaths over the age of 75, the rules differ between a UK registered money purchase scheme and a QROPS. For the former, income tax applies in the hands of the recipient. For QROPS, things are more complex, as demonstrated in this table.
3. Temporary non-residence
Individuals overseas who take benefits, may retrospectively have to pay UK tax on payments from their pension, made while they were non-resident, if the UK’s ‘temporary non-residence’ rules apply. These payments are normally only those in excess of their pension commencement lump sum and £100K of pension income.
These rules will apply if both:
- the individual returns to the UK within five years of moving abroad (or five full tax years if they left the UK before 6 April 2013), and
- the individual was a UK resident in at least four of the seven tax years before they moved abroad.
4. Double tax treaties (DTTs)
Sometimes double tax agreements can throw up compelling opportunities, particularly if tax is not chargeable where the pension is located and where the member resides, when the benefit is enjoyed. Care needs to be taken to understand the qualifying residency conditions overseas, and the completion of the‘DT-Individual’ form, should the pension come from the UK. HMRC’s newly updated ‘Digest of double tax treaties’ is a good place to start.
Some popular locations for the establishment of QROPS also have well developed networks of DTTs, such as Malta. Although for many people the option of transferring to a QROPS has become uneconomic due to the Overseas Transfer Charge, it may be more relevant for those who transferred before the charge existed.
