The UK's stance on pensionstransferring

For those moving abroad to work who already have an existing pension arrangement in the UK, the right to transfer the plan to their new country of residence depends on whether they meet the UK's stringent criteria

Many people who move abroad to work will have existing pension arrangements in the UK and may want to know whether they can transfer those benefits abroad.

The bad news is that working out whether it is advisable for someone to transfer will mean finding out as much as possible about pension arrangements in the country they are moving to, which may not be straightforward. In fact, it is very likely that an individual will have to seek advice both in the UK and their new home country to ensure a full picture of the options available and the potential consequences of transferring are obtained.

The good news, though, is that most transfers can take place without the need to obtain Inland Revenue approval, provided certain conditions are met. This article will set out those conditions.

Transfers of guaranteed minimum pensions (GMP), post-1997 contracted-out salary related rights, protected rights or safeguarded rights (contracted-out rights to which an ex-spouse has become entitled to as a result of a pension share) are subject to Department for Work and Pensions, rather than Inland Revenue, regulations. These benefits may also be transferred overseas, subject to certain conditions being met.

Transfers cannot be made to the following overseas schemes:

• A book reserve scheme.

• An unfunded or pay-as-you-go scheme.

• US-qualified retirement plans, including individual retirement arrangements (IRAs).

The Inland Revenue is so concerned that transfers may be made to US schemes that purport to be able to accept transfers from the UK but cannot, it is not happy for benefits to be transferred to the US unless the American Internal Revenue service has confirmed the transfer can go ahead. The Inland Revenue has also confirmed that it sees non-qualified plans as the equivalent of unapproved schemes and so transfer to this type of arrangements is not allowed.

With transfers from a UK occupational scheme or an S32 policy to an overseas pension arrangement, the following requirements must be met:

• No part of the pension has come into payment or become due or payable (apart from the commencement of pension in the form of income drawdown from an AVC fund).

• The transfer is made directly from the UK scheme to the overseas scheme.

• The transfer value does not provide benefits that exceed the maximum benefits at the date the member left pensionable service.

• The transfer value does not include an asset which is a loan made by the UK trustees to a participating employer.

• Where the member does not have a right to transfer value (a member has a right to a transfer value provided they leave service at least one year before NRD), the rules of the scheme must permit a transfer to an overseas scheme.

For transferring from a UK personal pension or retirement annuity to an overseas pension arrangement, the following requirements must be met:

• No part of the pension has come into payment or become due or payable.

• The transfer is made directly from the UK scheme to the overseas scheme.

One of the most important requirements is that the individual must be in employment or self-employment in the country to which they are moving. So anyone who is retiring overseas will have to obtain some form of paid work if they want to transfer their benefits.

This may conflict with the conditions under which they have been granted residency of the country concerned and leave them with no option but to leave their benefits in the UK. Our understanding of the Inland Revenue's position is that the option to transfer retirement benefits overseas is a concession.

If individuals who go abroad to work were not permitted to transfer their benefits, this might be seen as impeding labour mobility. However, this reasoning does not apply to people who are retiring overseas and so the Inland Revenue have not extended the concession to include them.

Transfers for non-controlling directors and non-high earners.

Providing the general conditions and the further conditions explained above are satisfied, Inland Revenue approval is not required where the individual is not a controlling director within 10 years of requesting the transfer and has not in any six tax years before the transfer request earned more than the earnings cap for the tax year in which the transfer request was made.

Evidence that the member was not a controlling director or a high earner and the evidence needed to satisfy the general and further conditions must be kept for six years from the date of the transfer.

Transfers for controlling directors and high earners.

Inland Revenue approval is required for transfers overseas for controlling directors and high earners (those who have, in any six tax years before the transfer request, earned more than the earnings cap for the tax year in which the transfer request was made). The Inland Revenue will require evidence to satisfy the general conditions, as mentioned earlier. It will also need confirmation that no part of the pension has come into payment, become due or payable (apart from the commencement of pension in the form of income drawdown from an AVC fund).

If applicable, it will require evidence that the rules of the occupational scheme permit a transfer to an overseas scheme where the member does not have a right to transfer value.

The individual's name, National Insurance number and their last Schedule E or Schedule D District and reference number will also have to be provided.

For transfers from occupational schemes, the name and Inland Revenue reference number of any other approved occupational pension scheme, providing aggregable benefits (including FSAVC schemes) will be required.

For transfers from occupational schemes, you will need to supply the name of the insurer and the policy number of any buy out policy bought by an approved occupational scheme that was providing aggregable benefits.

For transfers from occupational schemes, the name and Inland Revenue reference number of any personal pension scheme that holds a transfer value from an approved occupational scheme that was proving aggregable benefits will need to be disclosed.

Transfer of contracted-out benefits

It has long been the case that guaranteed minimum pensions and protected rights may be transferred to overseas occupational pension schemes. However, the question then arises as to what exactly is an occupational pension scheme.

This is defined in UK legislation in relation to UK schemes, but will overseas schemes fit neatly into our idea of what an occupational pension scheme is?

When the method of contracting-out for final salary schemes changed to the use of a reference scheme test on 6 April 1997, legislation set out that post-5 April 1997 benefits from a contracted out final salary scheme may be transferred to an overseas occupational scheme or an overseas arrangement. An arrangement could include a personal pension type scheme.

Then pension sharing came along and it became possible for a former spouse to receive a pension credit that could include safeguarded rights, namely contracted-out benefits. These benefits also may be transferred to overseas schemes or arrangements.

Regulations have since been made permitting transfers of protected rights but those to allow transfer of GMP to overseas arrangements have yet to put in an appearance. Protected rights, safeguarded rights and post-5 April 1997 contracted-out final salary scheme benefits can be transferred to overseas schemes, and GMP benefits may be transferred to an overseas occupational scheme provided the following conditions are met:

• The earner consents in writing to the transfer.

• The trustees or managers of the scheme have taken steps to satisfy themselves that the individual has emigrated permanently and, where the receiving scheme is an occupational pension scheme, that he or she has entered employment to which the receiving scheme relates

• The individual has acknowledged in writing that he or she accepts that the scheme or arrangement to which the transfer payment is to be made may not be regulated by UK law and so there may be no obligation under that law on the receiving scheme or arrangement to provide any particular benefit in return for the transfer payment

• Trustees or managers of the transferring scheme have taken reasonable steps to satisfy themselves the individual has received a statement from the receiving scheme or arrangement showing the benefits to be provided in respect of the transfer payment and the conditions (if any) on which these could be forfeited or withheld.

In addition, in the case of GMP, protected rights and safeguarded rights, the transfer must be of an amount at least equal to the cash equivalent as calculated in accordance with the relevant legislation.

While the Inland Revenue requires that an individual is in employment or self-employment overseas, the DWP does not, unless the proposed transfer is to an occupational pension scheme. So retired people may find that they can transfer their protected rights but not their non-protected rights. Now what was that about joined up government?

The Inland conditions for transferring benefits overseas quoted here are taken from the Inland Revenue Practice Notes IR12 and personal pension guidance notes IR76.