How do the new UK pension allowances affect expats?

Wondering how the new UK Pension allowances affect expats? It was announced in the Spring Budget last year that the lifetime allowance (LTA) would be abolished. Great news for anyone who has large UK pension pots in excess of £1 million. It means that you will no longer be subject to the lifetime allowance tax charge when you receive payments from your pension. However, there are now three new allowances. Below we look at how the new UK pension allowances affect expats.

Lifetime Allowance (LTA)

The lifetime allowance was most recently set at £1,073,100. Before 6th April 2023, withdrawals where this limit was exceeded resulted in an additional tax on the excess of 25% (for income) or 55% (for lump sums). A 25% tax on the excess also applied to overseas transfers where the LTA was exceeded. From 6th April 2023 to 5th April 2024, these tax rates were set to 0%, meaning no additional tax had to be paid where the LTA was exceeded.

This new 0% rate resulted in a window of opportunity between 6th April 2023 and 5th April 2024. During this period, anyone with a UK pension exceeding the lifetime allowance could have transferred to a QROPS, without being subject to an LTA tax charge. This made QROPS a much more attractive option for pensions worth more than the lifetime allowance. However, from 6th April 2024, three new allowances have come into effect in place of the LTA.

Lump Sum Allowance (LSA)

The new lump sum allowance relates to the tax free lump sums you take from your pension. Normally, UK residents benefit from being able to take 25% of their pension tax free. This is known as a pension commencement lump sum (PCLS). The LSA limits this to a maximum of £268,275 (25% of £1,073,100). This means those with pensions totalling more than £1,073,100 are affected. As an expat, the tax rate for lump sums taken from your pension depends on your country of residence. It’s important to take advice on the most tax efficient way to access your pension.

Lump Sum And Death Benefit Allowance (LSDBA)

The new lump sum and death benefit allowance introduces a maximum amount of £1,073,100 that you AND your beneficiaries can receive as tax free lump sums. Again, you generally won’t be affected unless your pensions total more than this amount.

If your pension is higher than the LSDBA, your beneficiaries will usually pay tax on the excess. If they take the benefit as a lump sum, they would be taxed at their marginal rates.

By taking the benefit as income instead, they will pay zero tax if you die before age 75 and income tax at their marginal rate if you die after age 75.

Overseas Transfer Allowance (OTA)

The overseas transfer allowance is also £1,073,100. If your pension exceeds this amount, you’ll pay a 25% tax charge on the excess when you transfer to a QROPS. This makes QROPS less appealing for many expats with very large pensions. As with any pension transfer, you need to take advice to be sure a QROPS is right for you. The tax implications depend on your country of residence. The penalties for getting it wrong can be severe. In many cases, it’s more suitable to transfer your pension to an International SIPP which is still based in the UK, and FCA regulated.

Transitional Tax-Free Amount Certificates (TTFACs)

It’s possible that your new allowances are reduced if you’ve crystallised pension benefits before 6th April 2024. For example, you may have transferred into a QROPS or taken money from your pensions when the Lifetime Allowance was lower between April 2016 and April 2020. You may be able to get an uplift in your remaining allowances if this is the case by requesting a transitional tax-free amount certificate.