Case Study: Customers who work overseas

This article is for financial advisers only. It must not be distributed to, or relied on by, customers. It is based on our understanding of legislation at the date of publication.


Introduction

In this case study we can explore the two common scenarios some UK employers face when expanding/ moving their business overseas.

The company...
has shops, a factory and head office, all based in the UK. It is looking to expand overseas in France and asks some of its employees if they’d like to be involved with this new venture.

Let’s meet the staff members considering this opportunity:

James, the Factory Manager, is asked to go on secondment to France for two years to oversee the set-up of the new factory and shop. He’ll live in France full-time during this period, work for the French part of the company and be paid in Euros. This means he’ll pay French tax instead of UK tax. During the secondment period he won’t have relevant UK earnings. There is a possibility that the secondment could turn into a permanent role.

Sally, the Factory Engineer, is asked to oversee the set-up of the overseas factory for six months, to calibrate the new equipment and ensure it runs smoothly. She’ll work in France during the week and come back to the UK at weekends and holidays. She’ll continue to be paid by the UK part of the company and will continue to pay UK tax.

The UK Pension Scheme

Both employees are existing members of the Group Personal Pension (GPP) Scheme. The scheme, where the employer currently pays a contribution of 8% and the employee 4% of basic pay, is a qualifying scheme for automatic enrolment purposes. Contributions aren’t paid by salary sacrifice.

The employer’s intention is to set up a pension scheme in France for its new employees.

The company has a Financial Adviser who is providing advice to both members of staff, who want to know how these changes will affect their pensions and want to ensure they are still in a pension scheme.

Although both members of staff are both moving overseas their employment situations are different and this will affect their pensions differently.  Let’s take a look at what the adviser will need to consider.

What are the staff members options?

James
Sally
Personal Contributions
  • For the current tax year, James will get tax relief on personal contributions up to 100% of his relevant UK earnings, or £3,600, if greater.
  • After that, as he won’t have any relevant UK earnings he’ll only get tax relief up to £3,600 for five full tax years after the year in which he moves abroad.
  • James will need to let his provider know he has moved abroad in order to stop collecting premiums1.
  • Sally will still be paid by the UK firm.
  • As she continues to have relevant UK earnings chargeable to UK income tax, personal contributions can continue to be made as before, and the limit on her personal contributions for tax relief purposes would still be the greater of £3,600 gross pa and 100% of her relevant UK earnings in a tax year.
Employer contributions
  • The UK company can continue to make employer contributions to the GPP as employer contributions are not restricted by whether the individual has relevant UK earnings.
  • Corporation tax should be granted by their local Inspector of Taxes where the contributions have been made ‘wholly and exclusively for the purposes of the employer’s trade, profession or investment business’.
  • Or, the French company, in theory, could make employer contributions to the UK GPP. They wouldn’t normally be able to claim UK corporation tax relief, but they may be able to make a claim under the French tax system2.
  • The UK employer can continue to pay employer contributions and should be able to claim corporation tax relief as before.
Increase contributions, pay in a single premium or transfer
  • Only existing contributions can continue subject to the conditions above.
  • Increased contributions, or payments of single premiums or transfers whilst overseas may not be possible. This would be classed as new business and will depend on the UK pension provider having permission to sell in France. (Note: Aegon can only accept new business from customers who are ‘habitually resident’3 in the UK.)
  • Sally should meet the definitions of being ‘habitually resident’ in the UK, and be able to increase contributions, and/or pay in a single premium or transfer as before.
Transfer overseas
  • It might be possible to transfer4 the plan to a qualifying recognised overseas pension scheme (QROPS), which could potentially include the scheme the French part of the company is setting up - if it satisfies HMRC’s conditions to be a QROPS.
  • Sally would need to demonstrate overseas residency or an employment link (to the French firm) to be eligible to transfer her pension.
Leave the GPP as it is
  • The benefits built up in the GPP can remain with the provider until he takes benefits and can be paid overseas or in the UK.
  • The normal conditions will apply in terms of taking benefits and testing against the lifetime allowance even if he is still overseas when he takes benefits.
  • To see how the pension benefits might be taxed if he remains overseas see our FAQ on Payment of pensions abroad.
  • The GPP can continue as normal.
Join the French pension scheme
  • It might be possible to join the overseas pension scheme for the period James works abroad, provided they meet its joining criteria.
  • It is unlikely Sally would meet the criteria for joining the overseas scheme taking into account the residency and employment link to the French firm.
Auto-enrolment
  • The UK employer may not have any further auto-enrolment duties to meet for James. They should consider:
  1. Is James still under contract with the UK company, or is he now contracted to work for the French subsidiary?
  2. Is he classed as ordinarily working in the UK under his contract of employment?
  3. Does his connection with the UK remain sufficiently strong despite the secondment overseas?
  • The Pensions Regulator recommends that if a company is having difficulties determining if a worker should be classed as ordinarily working in the UK, they should seek legal advice.
  • Employer duties for auto-enrolment usually lie with the employer who has seconded the employee.
  • Her contract remains with the UK employer and she ordinarily works in the UK under this contract.
  • There is also an expectation that she will return to working in the UK at the end of the secondment.
  • She should still be classed as an eligible jobholder for auto-enrolment purposes (provided she'll meet the other conditions for this).

Notes

1 Most pension providers (including Aegon) don’t accept personal contributions not eligible for tax relief (for members under age 75).

2 Note that the UK pension provider may have administration restrictions which stop this from happening for example, not being able to accept contributions in Euros or having a second employer connected to a GPP scheme.

3 The FCA’s definition of habitual residence is ‘a person’s main permanent residential address must be within the UK and that is the address that they provide when making an application’.  Aegon’s approach to the FCA’s rules on this may be different to that of other pension providers so it would always be best to check with the provider involved for their stance.

4 An overseas transfer from a UK pension arrangement is a Benefit Crystallisation Event (BCE) for lifetime allowance purposes, so it will use up some (or all) of the employee’s available lifetime allowance. In certain situations, a transfer to a QROPS can be subject to an overseas transfer charge.