Currently, UK pensions are taxed when they are paid out as income, but those living outside the UK – and where the jurisdiction in which they live has a double taxation treaty with the UK – only pay the local rate of tax.
The treaty, signed by the UK and UAE on 25 December 2016, is effective for UK personal tax purposes from 6 April 2017, and is considered significant and symbolic of the UK’s increasingly close ties with the UAE.
“This is an interesting development which could persuade UK investors based in the UAE to take advantage of UK self-invested personal pensions schemes (Sipps) offering flexi access drawdown, and subsequently access the benefits in the UAE free of income tax. This is a surprising potential advantage of the UAE DTA agreement,” Denton told International Adviser.
The loophole can be found in Article 17 of the DTA which specifies that other than government pensions, “pensions and other similar remuneration paid to a resident of a Contracting State shall be taxable only in that State”.
"This is a surprising potential advantage of the UAE DTA agreement.”
However, those wishing to encash their pensions, adds Denton, must ensure they satisfy the Statutory Residence Test 2013 in the UK, which means an individual must be regarded as non-UK resident to enjoy access to their pension free of UK income tax.
They must also be UAE resident at the point of withdrawal, meaning they must prove they have either s “habitual abode” or “centre of vital interest” in the Gulf state.
Qrops 25% charge
The tax agreement comes at a crucial time for the overseas pensions industry as earlier this month the UK made the shock announcement that it will impose a 25% charge on transfers to foreign pension schemes, especially Qrops, outside the European Economic Area (EEA).
Traditionally, British expats living in the UAE resorted to the lengthy, expensive and complicated process of transferring their UK pensions, many of which would have been final salary or defined benefit (DB), into qualifying recognised overseas pension schemes (Qrops) via Malta.
However, since the pension freedoms were introduced in April 2015, those with UK pensions can fully encash their retirement savings after the age of 55, but in the UK just 25% of this can be taken tax free.
As a result, for expats looking to transfer their UK DB scheme, Sipps have become the preferred option in most cases.
The DTA further reduces the need for a Qrops as British expats who are UAE residents can use their Sipp to withdraw their pension pots tax free.
The news is likely to come as a further blow to Qrops providers that service the Middle East.
Last year, Old Mutual reported a sharp drop in sales of Qrops following the pension freedoms, with net client cash flows for its international business plummeting by 33% in the first-half of 2016 to £200m ($260m, €233m), down from £300m in 2015.