Changes to the UK Overseas Transfer Charge

Whatis the Overseas Transfer Charge (OTC)?

The OTC is a charge introduced in March 2017 to tax transfers of UK pension funds that are transferred from a registered UK pension scheme to an overseas pension scheme. Where an exemption does not apply, a tax of 25% is levied on the whole of the fund being transferred.

What are the exemptions from the OTC?

There is no OTC charge when one of the following exemptions applies:

·        Same country exemption. The member and the receiving scheme are both in the same country.

·        The EEA or Gibraltar exemption.  The individual and the receiving scheme are both in a European Economic Area country or Gibraltar.

·        Occupational Scheme exemption. The transfer is to an occupational scheme.

·        International Organisation exemption. The receiving scheme is an international organisation, such as the International Red Cross, or the World Health Organisation.

·        Overseas Public Service exemption. The receiving scheme is a state sponsored public service scheme.

What is the Lifetime Allowance Charge?

The Lifetime Allowance Charge was a tax charge that applied to the value of a UK pension fund that exceeded certain limits. The Lifetime Allowance limit has changed considerably over the years, starting at £1 million, increasing to £1.8 million and reducing down to just over £1 million again.

At certain crystallization events, the value of a pension fund was measured against the Lifetime Allowance and tax was imposed at 55% on excess lump sums, or 25% on excess pension benefits. For transfers to Qualifying Recognised Overseas Pension Schemes (QROPS) the charge was always 25% of the excess over an individual’s Lifetime Allowance.

The charge is being abolished with effect from 6 April 2024, but has not been applied in the2023/24 tax year (6 April 2023 to 5 April 2024). During the 2023/24 UK tax year, pension transfers in excess of the Lifetime Allowance have been free from any Lifetime Allowance tax charge.

What are the principal changes?

The Lifetime Allowance Charge is effectively being re-introduced to transfers to QROPS by way of an extension to the OTC. Where the amount transferred by a UK registered pension scheme exceeds a person’s newly defined lump sum and death benefit allowance, tax will be due at the rate of 25% on the excess. The lumpsum and death benefit allowance is essentially equivalent to the old Lifetime Allowance.

In addition, the Member Payment Charges that the UK levies on non-resident individuals taking benefits from foreign pension funds that have had UK tax relief is also aligned to the lump sum allowance, with any excess above that allowance being chargeable to UK tax. For New Zealand residents, however, this does not apply because of the operation of the UK/New Zealand Double Taxation Agreement which gives New Zealand sole taxing rights on such benefits.

What can be done?

If you are in the process of transferring a UK pension fund that exceeds the Lifetime Allowance, then you should probably ensure that this is completed before 6 April 2024 as it may still escape UK tax on the excess. Otherwise, you must accept that after 6 April 2024 you will probably be back in the same position as you were before 6 April 2023 and that you have missed an opportunity to transfer your fund in a particularly tax efficient way.

As the Overseas Transfer Allowance is linked to the Lifetime Allowance, you should ensure that you have applied for all enhancements to your Lifetime Allowance, such as the Individual Protection 2016. The deadline for applying for such protection has now been set at 6 April 2025.

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