If you are considering transferring your UK pension overseas, you’ve likely encountered a bewildering array of jargon and regulations.
Among the most important terms you’ll encounter are the Overseas Transfer Charge (OTC) and the Overseas Transfer Allowance (OTA).
While these terms might sound dry, understanding them could save you thousands in unnecessary taxes when you retire outside the UK.
In this post, we’ll break down what you need to know about the Overseas Transfer Charge and Overseas Transfer Allowance, and why it’s crucial to get this right when considering transferring your UK pension to another country.
What Is the Overseas Transfer Charge (OTC)?
The Overseas Transfer Charge (OTC) is a tax introduced by the UK government in 2017 to discourage people from moving their pensions out of the UK to avoid taxes.
The charge is 25% of the value of the pension being transferred to another country.
The good news?
The charge doesn’t apply in every case.
But when it does, it hurts—so it’s important to know if you’ll be liable.
When Are You Exempt From the Overseas Transfer Charge?
Since its introduction in 2017, HMRC has collected over £100 million in OTC penalties from people transferring their UK pension to overseas schemes.
However, there are a few key scenarios where the OTC doesn’t apply.
You won’t have to pay the 25% charge if:
- You’re transferring your pension to a Qualifying Recognized Overseas Pension Scheme (QROPS) based in the European Economic Area (EEA), and you’re a resident of an EEA country.
- You’re transferring to a QROPS in the same country you live in.
- The QROPS is an occupational scheme or an overseas public service pension scheme, and you are joining as an employee
- The QROPS is set up by an international organisation, to provide benefits for current or former employees of that organisation
Example – If you’re a British expat retiring in Spain and you transfer your UK pension to a Maltese QROPS, the OTC doesn’t apply as both Spain and Malta are EEA countries.
The 5-Year Rule
This is the time period where the transfer charge may still apply if your circumstances change, following an original transfer.
For example, if you retire in Canada and transfer your UK pension to a Canadian QROPS, the OTC doesn’t apply as you and the QROPS are in the same country.
However, if, within 5 years, you decided you had enough of Canadian winters and moved to Thailand, then the OTC would kick in.
This period is at least 5 years from the date of the original transfer, with the specific length dependent on the date that your pension was transferred abroad:
- For transfers made on 6 April – the relevant period is 5 tax years from the date of transfer.
- Transfers not made on 6 April – the relevant period is the remainder of the transfer tax year plus the following 5 tax years.
What Is the Overseas Transfer Allowance (OTA)?
The Overseas Transfer Allowance (OTA) limits how much can be transferred to QROPS without an additional tax charge.
The OTA is set at the same level as the old Lifetime Allowance (LTA) which was phased out in April 2024– this means that your OTA is £1,073,100 unless you have any form of transitional protection (Fixed Protection, Individual Protection, etc.).
If you have any pension benefits which were crystallised before 6 April 2024, then your available OTA will be reduced by an amount equal to 100% of the value of your LTA usage.
Example – You are considering transferring your £650,000 SIPP to a QROPS.
Before 6 April 2024, you had already used up 55% of your pension LTA.
To calculate your available OTA, we must make a deduction for the pension that you used previously.
Deduction = 0.55 x £1,073,100 = £590,205.
So your available OTA is £482,895 (£1,073,100 – £590,205).
If you transfer the £650,000 in your SIPP to a QROPS, £167,105 will be subject to the overseas transfer charge and taxed at 25% (i.e. you will have a tax bill of £41,776.25).
However, proper planning can save substantial sums and ensure that more of your pension stays in your pocket.
For example, if you qualify for Individual Protection 2016 or Fixed Protection 2016, you can potentially increase your OTA from £1,073,100 to £1,250,00.
You can read more about Individual Protection 2016 and Fixed Protection 2016 here.
Case Study: Trevor and Maria’s Pension Transfer Dilemma—Deciding Whether to Transfer to a QROPS or Stay in a UK SIPP
Let’s look at an example to illustrate how the OTC and OTA work in practice.
Trevor (62) is British, and his wife Maria (61) is Spanish.
They recently moved to Spain to enjoy their retirement and be closer to Maria’s family.
Trevor has a Self-Invested Personal Pension (SIPP) with AJ Bell worth £1.4 million.
He was considering transferring this to a QROPS in Malta to simplify his retirement planning and take advantage of any potential tax benefits in Spain.
However, before making their final decision, Trevor and Maria needed to consider the impact of both the Overseas Transfer Charge (OTC) and the Overseas Transfer Allowance (OTA)
Financial Implications of the Transfer:
- Avoiding the OTC
Since Trevor is transferring his pension to a QROPS in Malta, and he and Maria are residents in Spain (EEA), the Overseas Transfer Charge would not apply.
By choosing a QROPS within the EEA and residing in an EEA country, Trevor would avoid the 25% charge on the full value of his pension.
- The Impact of the OTA
Trevor’s pension pot exceeds the old Lifetime Allowance (LTA) of £1,073,100 by £326,900.
As a result, he will be subject to a 25% tax charge, resulting in a tax bill of £81,725.
Their Decision
Ultimately, Trevor and Maria decided not to transfer Trevor’s pension to a QROPS in Malta.
The £81,725 tax charge for exceeding OTA was significant, and retaining the pension in the UK SIPP offered more flexibility without the tax penalty.
By keeping his pension in the UK, Trevor could still access a wide range of options, such as flexi-access drawdown, while avoiding unnecessary tax charges.
For Trevor and Maria, staying in the UK SIPP proved to be the more tax-efficient decision.
Key Takeaways For Anyone Looking to Transfer a Pension Overseas
- Transfers of UK pensions should only be made to a ‘qualifying recognised overseas pension scheme’ (QROPS) or will be taxed as an unauthorised payment
- The Overseas Transfer Charge (OTC) is a 25% tax on UK pension transfers that applies under certain conditions, particularly if you transfer to a scheme outside the EEA or change your residency after the transfer.
- A transfer to a QROPS will be tested against the Overseas Transfer Allowance (OTA). Exceeding this amount incurs a 25% tax on the excess.
- Both the OTC and OTA are crucial considerations when planning your pension transfer as an expat. Failing to plan could result in significant and unexpected tax charges.
- If you’re unsure how these charges apply to your situation, consult a financial adviser who specializes in UK pension transfers and cross-border financial advice. This will ensure you don’t fall foul of the rules and lose a large chunk of your pension to unnecessary taxes.
The Bottom Line
Between 2017 and 2022, nearly £12 billion was transferred to QROPS plans, showing a growing trend for moving British pensions overseas.
However, transferring a UK pension overseas is a complex decision with major tax implications.
Knowing your Overseas Transfer Charge from your Overseas Transfer Allowance can make the difference between a smooth transfer and an expensive mistake.
Contact me today to discuss your pension transfer options.
