If you are interested in knowing about QROPS and the Lifetime Allowance, currently £1,073,100, then this is the article should be of interest. Understanding how this works this could save you tax.
There are some articles out there already, but I have not seen any that talk about how the Lifetime Allowance Charge is tested against previously crystallised UK pensions.
QROPS and the Lifetime Allowance- BCE 8
A BCE is a benefit crystallisation event and BCE 8 refers to transfers of UK pensions overseas.
The value transferred to a QROPS is tested against the Lifetime Allowance (either the current or protected allowance) and if the value is above the Lifetime Allowance, then an income tax of 25% or 55% is applied to the excess.
QROPS and the Lifetime Allowance- BCE 1
There will be cases where people have funds just under the Lifetime Allowance and who have crystallised the fund and have gone into drawdown- either from taking an income or a lump sum. This is called BCE 1.
Having accessed their fund, they may find later on that a QROPS would be more suitable if living abroad.
Of course, a transfer overseas is a BCE 8. So, where would someone stand if they had already used up most of their Lifetime Allowance with BCE 1 when transferring a pension overseas? The BCE 8 rules still apply!
Prevention of double counting- QROPS and the Lifetime Allowance
Fortunately, Paragraph 17 Schedule 32 Finance Act 2004 comes into play to make sure that the whole fund that was crystallised at BCE 1 is not added to the fund being transferred to trigger a large BCE 8 tax charge.
The relevant part says-
Unlike for a transfer of crystallised rights from a registered pension scheme to another registered pension scheme, where no further BCE occurs, a transfer to a QROPS will produce further BCE i.e. a BCE 8 and so a further test against the lifetime allowance is undertaken.
Where a BCE 1 for a drawdown pension or a BCE 2 for a scheme pension may have applied at the time of the original entitlement to benefits, overlap provisions will apply. This will have the effect that the amount crystallised (or an appropriate proportion) under the original BCE 1 or 2 will be deducted from the amount crystallised under the BCE 8 occurring on transfer.
So, it is likely that a Lifetime Allowance Charge from a transfer to a QROPS can be either reduced or not be applied at all.
In order not to pay too much tax, then know what you are doing and make sure your adviser knows too. Contact me, even if you are an adviser, for further guidance.
Lifetime Allowance planning can be complicated enough, without having to consider overseas pension transfers. For anyone that is contemplating taking benefits (drawdown) soon, or already has done so, and is planning an overseas transfer make sure you take advice and limit or negate the effects of the Lifetime Allowance Charge.
Article Date 4th November 2020
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
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