New budget rule impacts British retirees planning to live overseas

Rory Poulter
·4-min read
Senior man reading touching letter from friend
-Credit: (Image: Getty)


It has come to light that older individuals hoping to use a loophole in their pension pot to relocate abroad may need to revise their plans due to recent budget changes. These alterations prevent retirees from taking two separate cash lump sums from their pensions without facing tax or charges.

Previously, after the abolishment of the lifetime allowance (LTA) in April—a ceiling on how much one can save in a pension before incurring tax—people could maintain £1,073,100 within their UK pension and shift any excess into a qualifying overseas scheme. Doing so granted them the ability to take 25% (or £268,275) of their fund tax-free from the UK scheme and another tax-free sum from the overseas pension.

However, a new regulation introduced by Rachel Reeves will see more people hit by an overseas transfer charge (OTC) when they move funds from their pension pot, seizing a substantial 25% chunk of the transferred amount. AJ Bell’s head of public policy, Rachel Vahey, who spoke with the i newspaper, referred to the closure of this loophole as generating "chaos" for those planning retirement abroad.

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She highlighted: "HMRC has removed the exclusion that the overseas transfer charge will not apply if someone transfers to a qualifying recognised overseas pension scheme (QROPS) in the European economic area or Gibraltar, even though they were not resident in the same country."

Senior man looking over his finances
Changes in the budget mean retirees can no longer take two separate cash lump sums from their nest eggs free of tax or a charge -Credit:Getty

"One consequence is those who want to retire overseas, but where there are no QROPS registered in their new country of residence, will be forced to keep their pension scheme in the UK or face a 25 percent charge on transfer," explained the expert. "As overseas residents may struggle to hold a UK bank account, and many UK pension schemes won’t pay to non-UK bank accounts, this could leave these overseas retirees in a difficult position."

They added, "Even where they can hold an account, they still face a harsh choice whether to juggle currency risks when taking pension income or lose 25 per cent of their pension wealth on transfer."

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During the budget announcement, the chancellor emphasised the necessity of implementing the new charge immediately to "address the risk of individuals receiving double tax-free allowances". The loophole had been open for over half a year, and the Government's costings document suggests that shutting it down could generate as much as £5m annually.

Ms Vahey from AJ Bell highlighted that worried pension members have reached out regarding their retirement plans after the recent changes. The introduction of the new rule poses challenges for those wishing to live in one country while transferring their pension to another.

For instance, if an individual decided to relocate to France and desired to take their pension along, it would not be feasible since France lacks QROPS on the HMRC list. However, countries such as Australia, Canada, Germany, Hong Kong, India, and Luxembourg do appear on the list.

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Individuals contemplating a move to a nation lacking a Qualifying Recognised Overseas Pension Scheme (QROPS) might consider transferring their pension to countries like Malta or Gibraltar, which are favoured options for those in such predicaments, despite facing a 25 percent transfer charge. John Clare, a pensions consultant at QB Partners, highlighted that numerous retirees have capitalised on a regulatory oversight that has permitted them to 'double dip'.

HMRC's policy paper pointed out this loophole as one possible explanation for roughly £1 billion of UK tax-relieved pension savings being relocated abroad. He commented: "Whilst there are some UK pension solutions that are suitable and available to non-UK residents, many UK pension members face issues when trying to manage and access their pensions overseas."

Clare added: "QROPS provided the necessary portability and flexibility for many to receive an income in their local currency, into their local bank account, without double taxation because of automatic UK withholding taxes. It is important that UK pension members living overseas seek specialist advice before making any decisions regarding their benefits."

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