Pension Tax for overseas pensions: additional information
Published 20 April 2017
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Income from pensions held overseas
Why 100% of a foreign pension will be taxable from 6 April 2017 when no UK tax relief was given on the pension savings
From 6 April 2017 100% of any foreign pension you receive if you’re a UK resident, including any from a qualifying recognised overseas pension scheme (QROPS), will be taxable in the UK in the normal way.
The rule to tax only 90% of a UK resident’s foreign pension was introduced to reflect the additional expenses incurred in earning that pension. The government isn’t convinced that this is now justified given that there is no similar deduction for UK accrued pensions that did not receive tax relief.
How UK tax rules apply to foreign pension savings that have had UK tax relief on contributions (such as migrant member relief or double taxation relief)
HM Revenue and Customs will provide guidance on how the new UK tax treatment of foreign pensions interacts with funds built up with UK tax relief before and after 6 April 2017 and the order in which funds are said to be used.
Lump sums from pensions held overseas
If you’re UK resident, the new rules apply to lump sums paid out of funds built up in overseas employer-financed retirement benefits schemes (EFRBS) while working overseas since 6 April 2017. Lump sums you’re entitled to receive out of funds built up before that date will receive their former tax treatment. This has been clarified in the Finance Bill.
Section 615 schemes
Schemes that provide defined benefits
The draft legislation has been clarified and extended so that the changes apply to section 615 schemes that provide defined benefits, as well as defined contribution schemes.
Legislation sets out that favourable tax treatment will no longer apply in respect of benefits built up in a section 615 scheme on or after 6 April 2017 but the changes will allow for limited increases after that date.
The limit will be the annual amount of increase in the pension previously allowed under the scheme rules or the rate of the consumer prices index.
Payments to a scheme solely to fund a deficit in respect of entitlement built up before 6 April 2017 will not lead to a loss of favourable tax treatment. Nor will they be considered additional benefit build up.
Benefits built up before 6 April 2017
Favourable tax treatment for specialist foreign service pension schemes will continue to apply to essential payments to those schemes made on or after 6 April 2017 in respect of entitlement to benefits that built up before that date.
Payments of administrative expenses on or after 6 April 2017
Payments made to a section 615 scheme to meet the administrative costs of running that scheme in respect of contributions and benefits built up before 6 April 2017, won’t lead to a loss of favourable tax treatment
Replacement schemes established after 5 April 2017
Schemes providing only replacement rights for those built up before 5 April 2017 in a section 615 scheme will be able to keep the same favourable tax treatment under the new scheme.
If a contribution is made or benefit accrual arises accidentally under a scheme after 5 April 2017
It is intended that contributions or build up of benefits after 5 April 2017, or any increases over the limit, will be treated in the same way as contributions to an EFRBS. They’ll be subject to the tax rules on EFRBS and employment income provided through third parties.