This guide is for financial advisers only. It mustn’t be distributed to, or relied on by, customers. It is based on our understanding of legislation as at May 2023.
In this guide:
- ‘ROPS’ means ‘recognised overseas pension scheme’,
- ‘QROPS’ means ‘qualifying recognised overseas pension scheme’ and
- ‘UK scheme’ means a UK-registered pension scheme.
A transfer from an overseas pension scheme can be made into a UK scheme, although it’s worth pointing out that some UK schemes will only accept transfers from an overseas scheme if it is a ROPS. If that’s the case, the receiving UK scheme should just need confirmation that the transfer is coming from a ROPS. There is no need to provide any additional evidence such as a copy of the transferring scheme’s rules. HM Revenue & Customs (HMRC) set the conditions a scheme must meet if it is to be a ROPS and it’s the responsibility of the transferring scheme to confirm that it meets those conditions.
To be a ROPS, the overseas scheme must meet the conditions to be an ‘overseas pension scheme’ and a ‘recognised overseas pension scheme’ set out in the relevant Regulations. These conditions are covered in HMRC’s Pensions Tax Manual at –
A ROPS should not be confused with a QROPS. QROPS status is only relevant where funds are being transferred from a UK scheme to an overseas scheme. For the payment to be an authorised transfer, the receiving scheme must be a QROPS. Further information on QROPS can be found in the Pensions Tax Manual.
When a transfer from overseas is accepted into a UK scheme, the transferred fund becomes subject to the UK scheme's rules regarding when benefits can be taken and what can be paid as pension benefits.
Some transferring schemes may ask the UK scheme to confirm that it will restrict the timeframe or way in which benefits arising from the transfer will be paid (for example, that benefits will not be paid before age 65). This is usually to comply with legislative restrictions in the home country which must ‘follow’ the funds if they are to be transferred. If the UK scheme is unable to give that confirmation, it’s likely that the transfer won’t go ahead.
The type of benefits available from the transferred funds will also depend on whether they wholly, or partly, represent benefits that have already come into payment under the overseas pension scheme. See the ‘Transferring overseas benefits that are already in payment’ section below for more details.
A transfer from an overseas pension scheme is ignored when testing the increase in benefits or contributions paid in a pension input period. If the receiving scheme is either a defined benefit scheme or a cash balance scheme, the amount of benefits funded by the transfer payment (defined benefit) or the amount of increased rights funded by the transfer payment (cash balance) should be deducted from the closing value when calculating the increase in benefits over the pension input period.
If the receiving scheme is a money purchase scheme, the transfer value is ignored as they are not counted as contributions for annual allowance purposes.
A transfer from an overseas pension scheme which isn’t a ROPS will count towards an individual’s lifetime allowance when benefits are subsequently taken from the UK scheme.
Where the transferring scheme is a ROPS, an individual can apply to HMRC for an enhancement to their lifetime allowance. The enhancement factor is referred to as a ‘recognised overseas scheme transfer factor’. In simple terms, this is calculated as the amount of the transfer divided by the standard lifetime allowance applying at the date of transfer.
The Government intends to abolish the lifetime allowance from 6 April 2024. Until then, any pension scheme savings that you crystallise will still be measured against the current lifetime allowance limit. Any amount taken over this limit will contain no tax-free element and will be taxed at the member's marginal rate when taken as income.
Example
Tom transferred £300,000 into his UK personal pension from a recognised overseas pension scheme on 10 May 2019. The standard lifetime allowance for 2019/20 was £1,055,000, so the transfer factor would be calculated by dividing £300,000 by £1,055,000.
The resulting factor would therefore be 0.29. If Tom decided to take benefits in 2023/24 these would be tested against a lifetime allowance of £1,384,299 (i.e. £1,073,100 plus (£1,073,100 x 0.29)) rather than the standard lifetime allowance of £1,073,100.
Note - if contributions to, or benefit accrual under, an overseas pension scheme after 5 April 2006 benefitted from UK tax relief, any amount transferred has to be reduced by a ‘relevant relievable amount’ representing the value of these contributions included in the transfer value.
An individual making a claim to HMRC for a recognised overseas scheme transfer factor must do so no later than five years after 31 January following the end of the tax year in which the transfer is made. HMRC's online form APSS202 should be used for this. In practice, an enhancement factor will only need to be applied for where the total value of an individual’s benefits in the UK is likely to exceed the standard lifetime allowance. It will therefore be rare to see someone saying they have a recognised overseas scheme transfer factor when taking pension benefits from a UK pension arrangement.
When HMRC receives an APSS202 form, it will send the individual a certificate confirming the recognised overseas scheme transfer factor. This will contain, among other things, a unique reference number, the date of issue of the certificate and the date from which it is valid.
If an individual is granted an enhancement factor, the factor can be applied at any benefit crystallisation event that takes place after the certificate has been issued. The individual will need to provide a copy of the certificate to the pension provider, or at least quote the reference number given on the certificate to them, so that the provider can calculate the percentage of lifetime allowance used taking into account the enhancement factor.
Where benefits are in payment in the transferring overseas pension scheme that would have represented either a scheme pension or drawdown pension if that scheme was a UK registered pension scheme, then it should be treated as a crystallised benefit in the receiving UK pension arrangement. This means:
- A tax-free lump sum cannot be paid when the replacement scheme pension is set up or when the funds are designated to provide a replacement drawdown pension in the receiving UK scheme.
- If the form of drawdown under the transferring overseas scheme is the equivalent of capped drawdown, the drawdown under the receiving UK scheme must also be capped drawdown unless an individual chooses to convert to flexi-access drawdown.
If the individual making the transfer is under age 75, the designation to provide a replacement drawdown pension or the replacement scheme pension will be a benefit crystallisation event (a BCE1 or BCE2 respectively). Where the transfer is coming from a ROPS, and there is a chance of an individual’s lifetime allowance being exceeded, they may be able to apply to HMRC for a recognised overseas scheme transfer factor, as described above.
In practice, some UK schemes will not accept transfers from overseas schemes where the benefits are already in payment.
It may be that an individual transfers funds out of the UK to a QROPS and then later wants to transfer them back again to a different UK scheme. This should be a rare occurrence, because transfers from a UK scheme to a QROPS are only expected to take place where an individual intends to leave the UK permanently.
The two examples below show how this should work depending on whether the funds transferred back into the UK are uncrystallised or crystallised:
Transfer back into the UK of uncrystallised funds
Angela moves abroad to live and work and transfers a fund of £1m from a UK scheme to a QROPS in the 2017/18 tax year, when the standard lifetime allowance (SLA) was £1m. The transfer used up 100% of the SLA through a BCE 8 and she had not had any BCEs prior to that.
The funds grow to £1.2m in the QROPS through further contributions and investment returns. Angela’s circumstances change unexpectedly, and she decides to return to the UK in 2018/19 and transfers her funds back into a UK pension arrangement during that tax year. The transferring scheme meets the conditions to be a ROPS so Angela can apply to HMRC for a recognised overseas scheme transfer factor.
The factor given is 1.17 (£1.2m/£1.03m, rounded up to two decimal places). £1.03m is the SLA in 2018/19.
Angela decides to take benefits in 2023/24 when the SLA is £1,073,100. The funds are worth £1.3m at that time, and the enhanced lifetime allowance is calculated as:
SLA + (SLA x enhancement factor)
= £1,073,100 + (£1,073,100 x 1.17) = £2,328,627
Therefore, Angela’s lifetime allowance in 2023/24 is £2,328,627. To work out her available lifetime allowance, the revalued BCE8 amount must be deducted. This is calculated as:
£1m (the amount tested under BCE8) x £1,073,100/£1m = £1,073,100
Where £1,073,100 is the current SLA and £1m was the SLA in 2017/18 at the time of the BCE8.
Angela’s available lifetime allowance in 2023/24 is therefore:
£2,328,627 - £1,073,100 = £1,255,527
The funds she is crystallising of £1.3m in 2023/24 are therefore tested against her remaining available lifetime allowance of £1,255,527. This means that no PCLS could be paid from the £44,473 excess and it would be taxed at her marginal rate at the point benefits were taken.
Transfer back into the UK of crystallised funds
The difference here is that the funds are tested against the lifetime allowance when they are transferred back into the UK. Using the same example of Angela above, if she had taken benefits when the funds were held in the QROPS this means that the funds would be treated as crystallised if they were subsequently transferred back to the UK.
Assume she took a tax-free lump sum and put the remaining funds into drawdown when they were held in the QROPS. If the value of her drawdown funds was £900,000 when they were transferred back into the UK in 2018/19, Angela could apply to HMRC for a recognised overseas scheme transfer factor. The factor would be 0.88 (£900,000/£1.03m, rounded up to two decimal places).
If this enhancement factor was in place when the UK provider tested the transfer against the lifetime allowance (as a BCE1), then the factor could be used in the test as follows:
Enhanced lifetime allowance = SLA + (SLA x enhancement factor)
= £1.03m + (£1.03m x 0.88) = £1,936,400
The full £900,000 would be tested against Angela’s available lifetime allowance. The calculation for this is:
Available lifetime allowance = £1,936,400 – (£1m x £1.03m/£1m) = £906,400.
So, the funds of £900,000 transferred back into the UK are tested against her remaining lifetime allowance of £906,400 at the time of transfer.