UK returnee faces Qrops to Sipp conundrum

Some schemes may be reluctant to accept a transfer

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Simon Simpson, aged 60, lived and worked as a pilot in Qatar for six years.

While there, he took out a qualifying recognised overseas pension scheme (Qrops) registered in Malta, transferring his UK workplace pensions into it.

He has now permanently returned to the UK to work as a freelance pilot and wonders if transferring the Qrops to a UK self-invested pension plan (Sipp) is his best course of action.

Blevins Franks’ Jason Porter assesses the situation in the case study below.

Can it be done?

In very simple terms, yes, it is entirely possible to transfer a Maltese Qrops to a UK Sipp; but, as usual, the devil is in the detail.

There are a number of individual points that may make it difficult for, or unacceptable to, the receiving UK pension scheme.

We are assuming Simpson did actually spend five continuous UK tax years (6 April to 5 April) as a non-resident, so there were no UK tax consequences from the original transfer to the Qrops when he returned to the UK.

In addition, that he established the Qrops and made the transfer(s) prior to 9 March 2017.

On this basis, there should be no issues around the overseas transfer charge.

While it is entirely possible to retain a Qrops while UK resident, if Simpson’s long-term intentions are to remain in the UK permanently, then a transfer to a UK registered pension scheme could be worthwhile.

This is because Sipps and workplace pensions are generally more cost effective than Qrops, though he should consider all the pros and cons of each vehicle, alongside his particular circumstances.

Crystal clear

When Simpson made his original transfer to the Qrops, a ‘benefit crystallisation event’ (BCE) calculation would have been undertaken.

This is the point at which the fund’s value is measured against the lifetime allowance (LTA).

So, if the value exceeded the LTA on the transfer to the Qrops, the transfer would have been subject to a 25% lifetime allowance excess tax charge.

Most pension transfers from overseas pension schemes to UK registered schemes are allowable and would be treated in a similar way to recognised transfers.

A transfer in from a Qrops will not cause any issues with the annual allowance, as these are not treated as a pension contribution into the scheme.

It is also not a BCE, and as such does not trigger a lifetime allowance test.

But it will count against the lifetime allowance when a BCE does occur.

Top up the pot

Without going into the detail of the calculation, a transfer from a Qrops to a UK registered pension scheme can lead to the enhancement of the LTA.

This might be an important factor if Simpson wishes to make further pension contributions and he is already close to the LTA.

Simpson must claim this enhancement no later than five years after 31 January following the tax year in which the transfer payment was made. It is his responsibility to ensure that he applies for the appropriate LTA enhancement.

The Qrops would normally write to confirm Simpson may be able to apply for an enhanced LTA, and that he should discuss this with HM Revenue & Customs and/or a financial adviser.

The benefits, once within the UK registered scheme, will be treated in the same way as other benefits in terms of tax-free cash and pension income payments.

The LTA including the enhancement factor will be the figure used to determine the total level of benefits that can be taken, including levels of tax-free cash.

Hurdles

Technically, a UK registered pension scheme can receive a transfer from a Qrops. However, whether the transfer will be approved by the receiving UK pension scheme will depend upon several factors.

Some UK scheme providers simply will not accept transfers from overseas, while others are reluctant due to the heightened due diligence and money laundering requirements.

Where benefits are in payment in the Qrops, then it should be treated as a ‘crystallised’ benefit in the receiving UK pension arrangement (a crystallised pension is where the scheme holder has taken cash via drawdown or annuity).

More commonly, many UK schemes will not accept transfers from overseas schemes where the benefits are already in payment, as a Qrops is unlikely to have carried out a BCE calculation at the point of crystallisation (BCE1, funds going into drawdown).

Funds held in drawdown require a further BCE (5A) carried out at the age of 75 years, but as the BCE1 is not available no further BCE test can be undertaken.

Jason Porter is a director of specialist expat financial advisers Blevins Franks, which was recognised as the Best Overall Adviser Firm in the International Adviser Best Practice Adviser Awards.