UK Pension Changes made in 2015
A number of very significant changes were made to UK pension laws in 2015. We have mentioned these changes in a number of places on the website, but thought it might be useful to bring those altogether and provide a summary, given the number of Australian expatriates and British migrants affected by the changes.
Greater flexibility in pension fund access
From April 6, 2015, UK pension schemes have been able to offer full lump sum payments and greater flexibility in terms of pension draw downs known as "flexi-access") post age 55. Prior to these changes, most pension schemes could only pay 25% of the members fund benefit as a lump sum, if their fund benefit exceeded £30,000. This approach provides individuals with more flexibility to choose the level of their income in retirement - in contrast to being forced to purchase annuities, as previously required.
No transfers from unfunded public service schemes
In an effort to reduce future pension fund liabilities, the UK government effectively banned transfers from unfunded public service final salary/defined benefit schemes to non-UK funds - for example through QROPS – and to domestic defined contribution schemes from April 6, 2015. Actual transfers from these schemes, in practice, could occur after this date but all paperwork needed to be in the scheme before April 6, 2015- with some schemes having set even earlier closing dates.
Despite this "official" announcement we continue to encounter situations where lump sum transfers are available from public funds and individuals should approach their fund Trustees individually to confirm their specific position.
Formal advice being required prior to certain pension transfers
From April 6, 2015 anyone contemplating transferring a (fully funded) UK defined benefit/final salary scheme either into an overseas scheme through QROPS, or even into a domestic UK defined contribution or “money purchase” scheme, has been required to obtain advice from a financial advisor who is independent of the fund. These advisors will need to be authorised by the Financial Conduct Authority and have appropriate experience. We can assist in providing access to this advice, but note that advice is not required if the funds in question have a value of £30,000 or less.
Management of the transfer process
At the present time, overseas advisers are able to communicate and liaise directly with their client’s UK pension funds if they have appropriate Letters of Authority. However, recent legislative changes in the UK threaten to make that process impossible to continue - clients may need to themselves contact their pension funds and arrange to receive information, such as current transfer values, and all appropriate documentation.
Taxation in Australia
Concurrently, in Australia, a relatively recent ruling by the ATO has "clarified" how any taxable portion of an overseas pension fund transferred to Australia is calculated. In very general terms the only portion of the fund which is taxable in Australia is the growth that has occurred in the fund from the date the fund member became resident in Australia until the date of transfer - as long as the transfer is from a fund which qualified as a "foreign superannuation fund" (FSF) - which includes UK transfers. Previously, the "usual" approach" taken was to calculate the AUD value of the pension on the date of first residency, based on the exchange rate (AUD vs. foreign currency) on that particular day, and subtract it from the AUD value on the date of transfer to arrive at the amount subject to taxation.
The ATO ruling however has indicated that the correct approach to calculating the amount of any taxable portion into AUD is to use the exchange rate applicable at the time the pension fund lump sum is received in Australia. So, the same exchange rate is used for both calculations and it is the one applying at the date the lump sum is received in Australia.